Microsoft reported third-quarter results last night, and the numbers just weren't that great.

By the numbers

Sales showed infinitesimal improvement over last year, moving from $14.4 billion to $14.45 billion. $0.47 a share in adjusted net income was a happier story, compared with $0.38 a year ago. Management took great pains to remind us that the year-ago quarter was the launch period for consumer-level Vista versions, so the comparisons should be tough.

With that in mind, the server software division showed some improvement while consumer software sales and profits slowed down a bit. The entertainment segment, while still very small in the grand scheme of things, boosted revenue by an impressive 68 percent year over year and actually turned a small ($89 million) operating profit. That's a rarity in this holiday-light reporting period.

The online services department reported $843 million in sales, up from $603 million last year. $143 million of the difference came from the recently purchased aQuantive, so the organic growth was a more modest $97 million, or 16 percent. Unfortunately, higher sales did not translate into operating profits, as the segment racked up $228 million in losses this time, 33 percent worse than last year.

Compare and contrast

Yahoo's report on Tuesday night showed 9 percent revenue growth and essentially flat earnings of $0.11 per share, if you remove a one-time gain of $0.36 per share from investments in Chinese search engine Alibaba. That's way better than Microsoft's online efforts, but the two would-be partners combined made just $173 million this quarter, which compares rather badly to Google's $1.31 billion net profit.

So how does all of this affect Microsoft's bid for Yahoo? Microsoft is still talking tough: "The strongest argument that I've heard on why we should increase our bid, simply that we can afford to, is not one that I favor," said CFO Chris Liddell. "We've yet to see tangible evidence that our bid substantially undervalues the company. In fact we see the opposite." The company still very much wants an agreement with Yahoo, but Liddell left the door wide open for a hostile takeover—or dropping the deal entirely.

The bottom line

Recent price action in the two stocks involved shows growing investor skepticism towards a quick deal. Microsoft's stock gained nearly 9 percent in value last week while Yahoo lost 4 percent. Given that the proposed deal is half in cash, half in Microsoft stock, that means that investors in Yahoo are willing to sell their shares at significantly less than the deal's value. The offer today stands at $30.62 per share, while Yahoo's stock sells for $27.30.

That points to either a lower bid directly to shareholders, or to a Yahoo-less Redmond. I still think the latter choice would be best for everyone involved, except Google. Yahoo is doing fine on its own, but would become a shadow of its former self if forced into a union with Microsoft. Glue two broken parts together, and you just get a broken, sticky mess. As a Google shareholder, I should be rooting for a merger, but I'd much rather see healthy competition than an easy win. That's just better for everybody.