24/7 Wall St.

At the coroner’s inquest about the dead deal for Microsoft (MSFT) to buy Yahoo! (YHOO) it became clear the Redmond got the best of it. For reasons which investors are not likely to fathom, MSFT is up almost 10% today, well above the market’s own push from its remarkable sell-off.

As the markets have thrown themselves into a pit, Microsoft has been off less than 15% while Yahoo! has swooned 30%.

But, Microsoft’s relatively strong performance has little to do with Yahoo!, while Yahoo!’s weak performance has everything to do with Microsoft. The portal company needed the deal to get an unreasonable price for its shares. In the fog of battle it was nearly forgotten that Microsoft is in the software business. Its internet operations are a sort of sore appendix which may have to be taken out.

Microsoft is not just a software company, it is the software company. The assaults from Linux, Google (GOOG) and Apple (AAPL) have not done it any harm, at least so far. And, they may not in the future. Redmond understands that the world hates the Vista operating system and is rushing to replace it. In the meantime, the company will probably steal the best aspects of products from its competitors. Stealing may be the wrong word. But, Microsoft will certainly borrow.

When the markets are mad even clever institutional investors cleave to the safety of the tried and the true. Microsoft is still a cash-flow machine with one of the half-dozen strongest balance sheets in the world. Wall St. understands that if the company dumped it internet or device operations, MSFT shares would probably rally back toward their 52-week high. Chief Executive Steve Ballmer has encountered enough problems and endured enough criticism for leaving his neighborhood that he may surprise the world and give up on what has not worked nor ever will.

While turning its back on its own strategic plans for expansion might seem blasphemous to those who think it is the right course especially now that Microsoft has put tens of billions of dollars into game consoles and websites, a superior intelligence may still prevail.

Douglas A. McIntyre