Investors eye Yahoo's alternatives to Microsoft

Yahoo Inc faced growing pressure on Sunday to find an alternative strategy to Microsoft Corp's $47.5 billion takeover offer after the software maker walked away over a disagreement on price.

Yahoo shares could fall by more than 30 percent on Monday over the breakdown of talks, but that drop could be softened if Wall Street believes Yahoo Chief Executive Jerry Yang has another strategy up his sleeve, analysts said.

Yahoo is likely to push for an advertising partnership with Web search leader Google Inc, sources familiar with the matter said. A tie-up with Google, seen as a big winner from the end of Microsoft-Yahoo talks, should help boost Yahoo's operating performance in the near term.

"It's time to get a move on with Google," said Jeffrey Lindsay, analyst with Sanford C. Bernstein. "Let's hope they weren't bluffing."

Yahoo is also still considering a deal with another Internet media and advertising major, such as Time Warner Inc's AOL, people familiar with the discussions said.

But Yang and the company he helped create could face a flood of shareholder lawsuits or other actions if nothing materializes.

"There are two things that could support the stock: the potential for Microsoft to return and the potential to do a Google deal," said Clayton Moran, analyst at Stanford Group.

Moran said Yahoo shares could fall to the mid- to low-$20 range on Monday from their $28.67 close last week. Other analysts said it could slip closer to $19.18, where it closed on January 31, a day before Microsoft made its offer public.

Microsoft shares are likely to rise on Monday, with its investors relieved that Chief Executive Steve Ballmer didn't shell out billions more for Yahoo, analysts said.

Microsoft on Saturday sweetened its initial $31-per-share offer for Yahoo to $33, but then withdrew from the talks when Yang dug in for a price of $37.

SHAREHOLDER CHALLENGE

While some Yahoo investors hoped it could wrest a price closer to $35 per share from Microsoft, a dissident shareholder said he would challenge Yang and the board over the collapse of talks.

"Shareholders didn't even get a chance to vote on the deal, but the board negotiated on our behalf and not in good faith," Eric Jackson, who leads a group of investors who collectively own 2 million Yahoo shares, told Reuters.

He said he would urge shareholders to withhold votes from the company's directors this year.

Yahoo officials were not immediately available to comment.

Bernstein's Lindsay estimates Yahoo could be worth up to $35 per share with a Google deal, and even $37 with more job cuts, but that drops to $25 per share if no partnerships are in the offing.

Yahoo has conducted tests with Google to outsource some of its search listings to its arch-rival. It has also held talks in tandem with AOL and Rupert Murdoch's News Corp.

A source familiar with the matter said on Sunday that the News Corp talks had cooled in recent weeks.

"It increasingly appears like Yahoo will pursue a Google search partnership," said Moran, who said he still favored a Microsoft buyout. "Given Google's position (in the market), a partnership with them cedes control and limits the long-term value creation for Yahoo."

BALLMER'S WARNING

Ballmer portrayed Yahoo's options as particularly stark in a letter to Yang detailing his reasons for pulling back, and suggested any Google tie-up would preclude a Microsoft deal.

Microsoft and Google are increasingly competing on the same turf, such as Web-based applications, email and messaging. The proposed Yahoo purchase was meant to create a fiercer rival to Google and challenge its hold on Internet advertising.

"The real winner in all of this seems to be Google," said Canaccord Adams analyst Colin Gillis. "There's going to be no powerful number two" in the Web market, he said.

Gillis rated Yahoo a "buy" with a $35 price target before the deal talks with Microsoft collapsed. "We were very clear that was not based on fundamentals," he said.

Ballmer also warned Yahoo that it would give up its relationship with advertisers by coordinating with Google and could lose some of its best engineering talent.

Some analysts disputed that idea, saying Yahoo's operating results would certainly benefit from a Google partnership.

Other Google partners, including IAC/Inter ActiveCorp's Ask.com, have structured deals that keep them in control of their advertiser ties, Bernstein's Lindsay said.

Microsoft, Yahoo could reach weekend deal: sources

Microsoft Corp and Yahoo Inc are making last-minute efforts to seal a deal before Microsoft takes its Yahoo bid hostile or abandons it altogether, sources familiar with the matter said on Friday.

Microsoft may raise its offer, now worth $42.2 billion, by a few dollars per share from an initial $31 per share to complete a deal as soon as this weekend, a person familiar with Microsoft's thinking said.

But talks are at a "sensitive stage" and a deal is not certain, sources familiar with the situation said.

Investors bet an agreement was likely, sending Yahoo shares up 7 percent to $28.67 on the first news of significant contact between the sides since Microsoft's deadline for its initial offer expired last Saturday.

"My sense is Microsoft is considering raising their price to the mid-$30s," said a San Francisco-based portfolio manager who owns both Yahoo and Microsoft shares, but would not be identified due to a company policy regarding shares that are actively traded.

Yahoo had previously refused to enter formal negotiations with Microsoft, saying the initial price it made public in February did not properly value Yahoo's search and display advertising technology, or its overseas holdings.

Every dollar added to the per-share price amounts to about $1.4 billion extra for the total deal at current prices, and Microsoft shareholders have questioned how much higher the company should go.

"If it's $35 or less, I think it's fine," said the portfolio manager, whose company owned 21.2 million shares of Microsoft and 1.93 million Yahoo shares as of the end of December.

NO QUICK EMBRACE

A deal could give Microsoft a stronger foothold in its battle with Internet search leader Google Inc, which is rapidly expanding into the software maker's own turf with new Web-based applications.

Microsoft Chief Executive Steve Ballmer indicated on Thursday he might sweeten the bid after weeks of saying publicly that his offer was fair as it stood.

"I know exactly what I think Yahoo is worth to me, exactly," Ballmer said at a meeting with Microsoft employees. "I won't go a dime above, and I will go to what I think it's worth if that gets the deal done."

Yahoo executives have repeatedly said the company was not averse to a deal with Microsoft at a higher price.

But in a sign of its reluctance, Yahoo has courted a possible deal with Time Warner Inc's AOL division and a search advertising partnership with Google.

Yahoo is still in talks on an alternative to the Microsoft bid, sources familiar with the matter said on Friday.

For its part, Microsoft has made clear it will not wait much longer. Ballmer said on Thursday that walking away was one of three options, along with striking a friendly deal or launching a hostile bid, and to expect an announcement shortly.

Microsoft shares fell 0.5 percent to close at $29.24. Yahoo shares closed at $28.67, up nearly 7 percent on the day.