Yahoo shares have fallen 20 percent since talks with Microsoft broke up, and some shareholders are blaming big egos for the failure.

Robert Hagstrom, a portfolio manager at Legg Mason Capital Management, the third-biggest institutional shareholder of Yahoo, said the only way to try to catch up with Google is to put Microsoft and Yahoo together:

I thought the dynamic was great. Unfortunately, personalities got involved, egos got involved and that I think disrupted negotiations. I was shocked, shocked that Microsoft walked away.
Microsoft’s problem is that 80 percent of its business is going to go away one day… Microsoft has to figure a way to get a lot of eyeballs. Well, who’s got the most eyeballs after Google? Yahoo. I didn’t see why this couldn’t go together.

As our mutual funds reporter Muralikumar Anantharaman reports from Morningstar’s annual investment conference in Chicago, Hagstrom is not sure if he will support activist investor Carl Icahn’s proxy to oust Yahoo CEO Jerry Yang.

Yang turned down Microsoft CEO Steve Ballmer’s $33-per-share offer for the company he co-founded:

It’s going to be so interesting a year from now, either Ballmer will look like the fool or Jerry will look like the fool, if Jerry is not fired by Icahn if he gets the board. But somebody made the wrong decision. Steve either made the wrong decision walking away or Jerry made the wrong decision not to sell. And their careers will be defined by that in the next 12 months.
Jerry owes me $33. Steve says it wasn’t worth it. We’ll find out.

Brian Rogers, chairman of the board and chief investment officer at T. Rowe Price Group, said they were happy with the deal Microsoft proposed:

A normal outcome would have been a slight sweetener to the original Microsoft bid. You raise it by $2 and everybody kisses and makes up and hugs. And that’s not an uncommon outcome in these circumstances.
The return of one of the founders of Yahoo to running the company after the turmoil they had a couple of years ago probably was a big barrier to that. Because whenever you have the kind of legendary founder returning, it becomes a different dynamic.
I think in hindsight, one wonders if there could have been a reasonable compromise found between Yahoo and Microsoft if some of the personalities weren’t the way they were.

In a sign of how desperate investors are for Microsoft to come back to the negotiating table, Yahoo’s reorganization announced on Thursday didn’t manage to save the stock in a down market — but blog rumors on Tuesday that talks were back on sent Yahoo shares up 15 percent.

As Hagstrom put it

What a soap opera! You can’t write a better soap opera than Yahoo, Microsoft.

(Photo: Amazon)