Microsoft in quandary over Yahoo bid

updated 7:27 p.m. ET April 26, 2008

SAN FRANCISCO - Microsoft Corp. is no closer to buying Yahoo Inc. than when it made its $44.6 billion bid nearly three months ago, leaving the software maker in a quandary over whether the deal is still worth pursuing.

A decision is likely to emerge in the next few days after Yahoo allowed Saturday's deadline to expire without accepting the offer. Microsoft has indicated it probably won't reveal its next move until early next week.

The tense mating dance is at a standstill because Yahoo's board has repeatedly said it won't sell to Microsoft for less than $45 billion, even though the bid hoisted its stock shortly after it hit a four-year low in late January.

(Msnbc.com is a joint venture of Microsoft and NBC Universal.)

The impasse has left most analysts predicting Microsoft will either sweeten its offer or attempt to replace Yahoo's board with a slate of directors who will embrace a takeover.

But the architects of Microsoft's bid — Chief Executive Steve Ballmer and Chief Financial Officer Chris Liddell — have been signaling the Redmond, Wash.-based company might abandon the bid and leave Sunnyvale, Calif.-based Yahoo twisting in the wind.

The public remarks of Ballmer and Liddell could be just part of a negotiating ploy aimed at pressuring Yahoo to the negotiating table.

Should Microsoft walk away?
But some analysts think Microsoft would be smart to walk away now.

By turning a cold shoulder, Microsoft could position itself to return with another bid this summer in hopes of completing the acquisition without suffering through the disruption and rancor likely to erupt if Microsoft were to try to oust Yahoo's board in a risky process known as a proxy contest.

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This scenario could only pan out if Microsoft is correct in its belief that Yahoo is stuck in a downward spiral after steadily losing ground in the online advertising market during the past two years.

Unless Yahoo can bounce back, its shares might eventually drop even lower than their $19.18 price when Microsoft made its initial bid of $31.

Yahoo shares fell 50 cents to finish Friday at $26.80, pulled down by the declining value of Microsoft's cash-and-stock bid.

Driven by Wall Street's disappointment with the company's short-term outlook, Microsoft shares dropped $1.97 to $29.83 on Friday. The decline lowered the value of the Yahoo bid to $42.7 billion, or $29.68 per share.

If Yahoo's stock were to plummet into the mid-teens, Microsoft conceivably could return with another offer that would probably be more warmly received than its original bid.

"Yahoo management would be under inordinate pressure to accept at that point," said Dinosaur Securities analyst David Garrity. "Why go through all the distractions and expense of a proxy fight if you see another way" to an amicable transaction?

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