Microsoft in quandary over Yahoo bid

Yahoo management has expressed confidence in a turnaround plan that projects revenue increases of 25 percent in 2009 and 2010. But analyst estimates for those years have remained substantially below those targets — a sign of the widespread skepticism about whether Yahoo will be able to reach its ambitious goals.

Abandoned takeover bids have paved the way to corporate acquisitions before. Just last fall, Oracle Corp. withdrew a $6.7 billion bid for rival business software maker BEA Systems Inc. after being spurned and then wrapped up the takeover for $8.5 billion three months later.

Other analysts remain convinced Microsoft will either raise its bid or launch a proxy contest because it needs Yahoo's franchise to mount a more serious challenge Google Inc.'s dominance of the Internet's search and advertising market.

"We still believe (Microsoft) is committed to completing the transaction and is unlikely to walk away," Citigroup analyst Brent Thill wrote in a Friday note.

McAdams Wright Ragen analyst Sid Parakh said he can't envision Microsoft raising its offer, especially since Yahoo's management hasn't proven its strategy will boost the company's stock price above $30 on its own.

Microsoft's current bid is "already a stretch, and I don't see any reason for them to really bid against themselves," Parakh said.

Yahoo could try to extract a higher bid by farming out some of the advertising on its Web site to Google. The two sides just completed a two-week trial that allowed Google to show text-based advertising along a small percentage of Yahoo's search results.

Yahoo board emerges mostly unscathed Pickens rips Yahoo management, dumps shares Yahoo settles with activist investor Carl Icahn Congress holds hearings on Yahoo-Google deal Yahoo spurns Micosoft again as blood boils Microsoft seeking allies for new Yahoo move Yahoo’s board takes its case to shareholders Yahoo shakes up management team

A long-term advertising partnership with Google probably would provide a significant boost to Yahoo's profits, but antitrust concerns might block an alliance between the owners of the Internet's two largest search engines. Combined, Google and Yahoo control more than 80 percent of the U.S. search market.

Yahoo also has been exploring a possible merger with the online operations of Time Warner Inc.'s AOL, but most analysts view that as a weaker alternative to a Microsoft takeover.

As it stands now, Yahoo's first-quarter revenue growth of 9 percent is far behind both Google's and Microsoft's online services division, which climbed 42 percent and 40 percent, respectively.

That's just one reason Garrity believes Ballmer and Liddell are realizing that Microsoft doesn't need Yahoo at any price.

"Sometimes the best deals are the ones that aren't done," he said.

MORE FROM U.S. BUSINESS

U.S. business Section Front

BofA to pay $8 billion over subprime suit   BofA to cut dividend in half, sell stocks Meltdown trips up aspiring investment bankers Citi says it is suing over Wachovia, Wells deal   EBay to cut 1,600 jobs, buy Bill Me Later Eli Lilly to buy ImClone for over $6 billion Battle for Wachovia tilts toward Wells Fargo Schwarzenegger predicts difficult path for Calif. FAA faulted on airline repair outsourcing AIG plans sale of business units to repay debt U.S. business Section Front   Add U.S. business headlines to your news reader: