Microsoft in quandary over Yahoo bid as key deadline looms

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.

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.

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AP Technology Writer Jessica Mintz in Seattle contributed to this story.