Microsoft in quandary over Yahoo bid as key deadline looms

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?

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.