The Microsoft-Yahoo! rumors are back in full swing. The Times Online (see article) is reporting that Microsoft is in serious talks to acquire the search business of Yahoo! for $20 billion, much less than the original $47.5 billion offered for the company this past summer. Details have Microsoft obtaining a 10-year agreement to manage the search business with a two-year call option to buy the search business for $20 billion, which would leave Yahoo! with its email, messaging, and content services businesses. It is worth noting that the BoomTown blog is reporting that the story may be "Total Fiction," based on comments from those who are reported to be involved in the deal (see post). The post also mentions how the entire market cap of Yahoo! is just $16 billion. Yet, offering a premium to shareholders, even for only the most valuable part of the company, is certainly not unheard of.

The rumors have been given some leverage with the recent announcement that Jerry Yang, the CEO of Yahoo! will be stepping down as soon as a replacement can be found. Yang was thought to be the main roadblock to a summer merger. The news that Google has decided to pull out of its advertising deal with Yahoo! also helps to clear the path for a new merger agreement (see MarketWatch article). Always one to sense an opportunity, Carl Icahn has begun purchasing more shares of Yahoo! (see WSJ article), recently adding 6.8 million shares, raising his stake to about 5.5 percent of the company. The additional $67 million is a drop in the bucket compared to the nearly $1 billion that Icahn has already lost on previous positions, but does give him more bargaining power regarding any future board members and CEO.

Whether all of this is just another case of throwing good money after bad is yet to be seen. Yahoo! stock is up a few dollars to $11.51 per share after falling to a 52-week low of $8.94 a share. While Icahn has made some money on his recent purchases (average cost of around $9.88 a share), he may once again be at the mercy of any potential deal in order to realize the original value he was hoping to receive. With a larger stake, and current CEO Yang now less of a roadblock, Icahn may finally get the deal he wants, even if it ends up costing him after all is said and done. Retail investors that skipped the first and second rounds of merger talks, but have now entered after the most recent round of speculation, may fair better. Of course, this may have less to do with Microsoft and a growing Icahn put, and more to due with a market that is attempting to build a bottom and change momentum.

Reuters is reporting that Microsoft and Yahoo! are talking again. Apparently sources from each company have confirmed the talks. The report also mentions that: "The information we have is thin, but what one source is saying [is] that Microsoft is talking a price lower than the $33 they were offering when the talks disintegrated in May." Maybe the thought of going below $20 a share, which seems to be a real possibility given the recent price action of their stock, not to mention the current market environment, has Yahoo! reconsidering their agreement with Google. Of course, Yahoo! does have an escape clause - but that would require them to merge with someone. If it is Microsoft, escape is free. If not, it will cost another company $250 million more to acquire Yahoo!, paid directly to Google. Maybe "Microhoo" is not dead yet. The incentives are certainly there. I imagine Carl Icahn is also actively banging the drum behind the scenes, still hoping to bring home a return for all his billionaire friends that lined up behind him, at least those that have not already added to the recent selling pressure.

Update: CNBC is reporting that there are no new talks. Of interest is that the initial version of the Reuters article mentioned "unidentified sources," or something similar, but after reports were not confirmed by CNBC, they print that the source was the TechCrunch blog. Interesting. The TechCrunch blog also responds: "What we’ve heard is that the two sides are in current discussions over a complete buyout, not necessarily that there’s a deal in place or even that Microsoft has made any kind of firm offer. Another source at Microsoft reiterates to us that they’re a buyer at the right price, but isn’t saying what that price is."

After a short hibernation, the Microsoft-Yahoo saga is back in the news (for the time being I am taking the ! off the Yahoo name given that the excitement is now gone). Per the Wall Street Journal, Microsoft and Yahoo have decided to give up their plan courtship, but of course, each leaves open the right to form some type of partnership in the future. Yahoo then went right out and got engaged to Google (which it can back out of with a change in leadership - i.e., Yahoo decides later it really prefers Microsoft).

To be honest, it is all a little boring anymore. Like many merger agreements and talks, value usually gets destroyed instead of created. This certainly seems true for Microsoft, given that Yahoo is now partnering with their main rival Google. For their troubles, Microsoft left with nothing but a bruised ego and a stronger main competitor. Microsoft stock did pop on the news, as investors were glad that the distraction was gone, at least for now. Eventually they will realize they lost this part of the Internet, and will begin scratching their heads and wondering what to do next - as well as praying that the Xbox 360 numbers are better than expected, and that Vista is not really that bad. Sigh.

Of course, Yahoo really did not fair much better. For a company that built itself on search, they have essentially farmed-out the business to their main competitor. Exactly how this is good in the long-run is difficult to understand. But as Yahoo CEO Jerry Yang mention, this will bring $800 million in annual revenue through improved monetization. No mention was made of loss of market share. Sigh.

And of course, there are the billionaires - Icahn, Pickens, and Cuban. Cuban will not get his board seat, and Icahn and Pickens, well, they will not get richer - at least not yet. I am sure they will be fine. As for the other Yahoo investors, some of which were invested through funds, well, they did not fair as well. Each may have a wait a while before seeing Yahoo at the proposed $35 a share price. Sigh.

Any winners? The same winner before everything was put into motion - Google. Without really doing too much it was able to chop a leg out from under and weaken the behemoth Microsoft, who while inept in search and the Internet, still has a lot of money to throw around. At the same time it took its next closest competitor and put a leash on it. Not bad for six months of press releases and the extension of a previous beta test agreement with a competitor.

In the end, nothing much has changed. Microsoft continues to trip over itself when it comes to the Internet, Yahoo continues to destroy value, the billionaires are still rich, small investors still absorb the lost capital, and Google continues to dominate search. Myself? I just feel a little hung-over.

As reported by the WSJ, Microsoft and Yahoo! are apparently talking again. In the statement provided by Microsoft, the company highlighted that it is "considering and has raised with Yahoo an alternative that would involve a transaction with Yahoo but not an acquisition of all of Yahoo." This is certainly a change of approach from the recent "take it or we will go hostile" strategy. Interesting indeed.

For Yahoo! this new discussion makes sense, given that it would allow Yang and the Board to potentially save face and give Yahoo! the strategic partnership it needs, while also maintaining control of their company (depending on the stake). For Microsoft, the motivations are less clear. In the short-term it does show that once again they are willing to negotiate, moving further away from the hostile disposition that did not go over well with some investors. As for strategy, it would make Yahoo! pullback on its talks with Google, at least in the short-term, as the potential partnership/merger between Microsoft and Yahoo! progresses. A partnership with Google was always an unwritten poison pill for Microsoft, and Yahoo! had certainly been playing its card. Whether Google wanted to partner or not really did not matter. It served both of their needs as it continued to distract each company while helping Yahoo! fend off a hostile takeover. If a deal with Google has fallen through (which some suspected after the Microsoft merger talks fell through), then it would also allow Yahoo! to save face, once again.

Still, on first read it is difficult to tell whether a merger or partnership would be better for Microsoft. A partnership would allow both companies to remain intact (for the most part), maintaining the two diverse corporate cultures. It may also prevent talent at both companies from bolting out the door, or Googling for jobs at, well, Google. Of course without a merger, Microsoft would certainly have less input on Yahoo! search and advertising, making integration slightly more difficult. The WSJ article also stated that the deal "... would involve Yahoo carrying search advertisements from Microsoft." This seems hard to believe considering how Yahoo! was testing and considering farming out aspects of its advertising to Google. This alone makes me think we have not heard, or are being told, the whole story.

How this will play out for each stock is yet to be seen. It really depends on the type and size of the deal, as well as how much control Yahoo! retains. Whether Icahn and numerous other investors and speculators will get paid is also yet to be seen. Any formal predictions on a final outcome? Not from me. At this point it seems foolish to predict that we might be near the end game when the game keeps changing.

The rumors are true. Carl Icahn will be making a play for the Yahoo! board. In hindsight, this makes sense. Icahn loves situations where both the current retail investors and big shareholders are dissatisfied. It does not hurt if management is also not appearing to listen to shareholders. Having options, such as buyers or potential merger partners, also helps. In this case, Icahn has all three.

Of interests in the recent news is how Icahn is planning to nominate a full slate of directors, up to 12 in total (Update: Looks like it will be 10). At first blush this looks risky, and potentially less successful, but is also probably a wise and typical Icahn move. If the board is approved, then Icahn can essentially do what he wants with the company, including removing Yang and selling the company to the highest bidder. On the other hand, if the move fails, because shareholders were not that dissatisfied as originally expected, then Icahn can walk away, and hopefully sell shares at or slightly above what he paid for them, letting Yahoo fix its own problems.

Of course, trying to nominate a full board could simply be a strategy to get some, but not necessarily all of the board after a series of negotiations with the current board and management. Nonetheless, he probably needs at least half to influence a board that is seemingly in the pocket of its management, and who at this point appears unwilling to negotiate and accept a reasonable price for their company.

What also may be more important is not the shareholder vote and number of board seats, but whether Icahn can convince Microsoft to come back to the bargaining table. If he can accomplish this, I suspect the large shareholders he needs, along with enough retail support, will fall into line and make the proxy contest successful. But getting Microsoft on board will be tricky. While still probably wanting Yahoo!, Microsoft has publicly stated their intention to move on, and Ballmer is not know for wavering. Furthermore, Microsoft has to think about whether they want a vocal activist in their corner, and whether they want this same activist to eventually own a small, but significant portion of their stock after the sale - assuming cashing out is not part of the deal.

Yahoo! shareholders have until the end of the day Thursday (10 days after the announcement last week of the date of the shareholder meeting) in order to nominate candidates for Yahoo!'s board of directors. As discussed earlier, this short time was no accident, and puts the pressure on shareholders to get together and get organized, or find an high level investor willing to take the lead. If one were to take the lead, it would need to be someone with a large position, someone with the potential to make it larger, and someone not shy about stating their intentions? Who could it be? Any whales fit the bill?

Both CNBC and the WSJ are reporting that Carl Icahn may in fact be the vocal whale that disgruntled shareholders are looking for. Apparently Icahn is considering fighting for control of the company's board, with sources stating that Icahn may have acquired as many as 50 million shares of Yahoo!, or over 3.5% of the company. And of course, Icahn has the capital to acquire more if he wanted to. Again, the timing of the purchases is not totally clear, but it would explain somewhat how the stock has been propped up over the last few weeks.

This of course begs the question: Why does Icahn want control of the board? Does he really think that Microsoft will come back and offer $33 a share once again? Can he convince them to come back? Is there another strategic partner waiting in the wings? Does he want to integrate Yahoo! with Blockbuster and Circuit City? Just kidding about the last one ..... at least I hope. Seriously, other than Google or Microsoft, who could really partner with Yahoo! and add value, and would either Microsoft or Google, even if they were to partner, even pass anti-trust reviews? It is possible that there is a Time Warner / AOL connection, but again, the ability to add value is probably limited. It is really hard to see what his motivation is, other than believing he can get Microsoft back to the table with a +$30 offer, making a nice 20% or so profit in his shares. Otherwise, if it is not Microsoft, it is hard to see other integration possibilities that add value, just as it is hard to see how integrating Blockbuster and Circuit City together builds synergy. But then again, he is Carl Icahn, and he currently has a couple billion or more reason why he knows better than I do. Time will tell.

Now that the Microsoft's takeover attempt of Yahoo! is over, Google does not appear to be as willing to move so fast in setting up a partnership with Yahoo!. Apparently, Google executives are now divided as to whether to pursue an advertising deal with Yahoo, and also divided as to what benefit it does for Google to help prop up a competitor. Microsoft is also continuing to move away from the Yahoo! discussion, and is now talking about possibly striking a deal with Facebook - although Facebook is apparently not excited about selling the entire company. Microsoft bought a 1.6% stake in the company last year, valued at $240 million. If their valuation stays the same, Microsoft would need roughly $15 billion to takeover the company, and probably a little more to get the deal done. If offered, it will be interesting to see if Facebook CEO Mark Zuckerberg takes the same approach as Jerry Yang and the Yahoo! board. A $15 billion valuation would be hard to turn-down.

Tickers: YHOO, MSFT

Yahoo! announced yesterday that its annual shareholder's meeting will be on July 3rd. The announcement also states that:

"Under Yahoo!'s amended and restated bylaws, notice of a stockholder's nomination of persons for election to the Board of Directors of Yahoo! at the 2008 annual meeting must be received by the Corporate Secretary at the principal executive offices of the Company no later than the close of business on May 15, 2008."

Therefore, by 1.) announcing the meeting details right after the Microsoft fiasco, and by referring to their recently amended bylaws that only gives shareholders 10 days to put a new slate of directors together for consideration at the board meeting, and by 2.) having the annual meeting the day before the July 4th holiday, when may shareholders will have other travel plans, Yahoo! is once again showing total disregard for its shareholders.

I would not be surprised to see the current board start to get nervous and begin making outside comments, or at least hear current shareholders rattle the cage a little. As with many poison pills and shareholder rights provisions, the provisions themselves often come back to hurt the very shareholders they are suppose to help.

Ticker: YHOO

As expected and discussed, Microsoft did raise its offer to $33 a share. Also somewhat to be expected, Yahoo! wanted more money. What was not expected was how Microsoft decided to not go hostile, and simply said see you later, it is time to move on. Given that the current negotiations had gone on too long, and that a hostile bid would have probably destroyed value for each company, I imagine that right now many Microsoft shareholders and employees are cheering. While some Yahoo! employees are also probably happy with their new increased level of job security (for now), and being able to avoid a forced culture clash between the two companies, I am sure that many Yahoo! shareholders are beginning to considering new lawsuits, besides those already in process. To not take a $33 a share price to the shareholders for a vote will certainly get the activists and lawyers interested.

In the end, Ballmer held to his reputation of not messing around, being upfront, and playing tough but fair. He did give a little, but in the end stayed true to his word. A lot of people were talking about how both Microsoft and Steve Ballmer needed this deal, yet he was still not willing to overpay. Walking away may end up being the smartest thing Ballmer did. By sweetening the deal by $5 billion, and also deciding to not go hostile, Ballmer has put Jerry Yang and the Yahoo! board on the defensive. Monday trading should be interesting, as some are already expecting Yahoo! to fall to $20 a share or less. Yahoo! will certainly continue to tout the increased revenue earned from farming-out ad revenue to Google during its recent trial run, but Yahoo! will need to have more to offer current shareholders in order to convince them that value and cash was not left on the table. This may end up being more difficult than negotiating with Microsoft.

Losers: Yahoo!
Winners: Google, Time Warner, News Corp., and possibly Microsoft if they play their cards right in the next few months

Expect Microsoft to possibly make a play for AOL or MySpace in due time. Expect Yahoo! to try and generate further relationships with Google. Whether Google continues to cooperate, and to what extent given that Microsoft has walked away, will be interesting to watch.

Microsoft is once again stating that is may go hostile in its bid for Yahoo!. If press reports (and rumors) are correct, Microsoft is considering $33 per share, a value I have long felt was fair, and a value that would get the deal done. Maybe I am wrong, given the personal pride and level of greed that has entered the equation for each company. Major shareholders of Yahoo! are apparently now saying they want a $35-$37 per share offer, essentially twice the value of Yahoo! before the bid. Ah, we can dream.

Ballmer has reacted to recent price levels by saying that he will not pay a dollar more than what the company is worth. This of course sounds good, but also gives him the ability to raise the bid if he feels there is suddenly more value. Unfortunately, we may have reached a point were you have to wonder whether any of this is good for anyone. As discussed before, hostile bids typically have many unintended consequences, most if not all of which are negative. A higher bid would also not be looked upon favorably by many current Microsoft shareholder, all of which have seen the recent momentum in their stock halted, and even depressed, as the Yahoo! takeover attempt has played out.

So should Microsoft drop the hostile bid? Not exactly. Given that Yahoo!, its board, and major shareholders seem to be getting a little greedy, Microsoft may have even more leverage. Going to $33 or $34 a share, above the original $31 offer (that is not exactly $31 anymore), would represent a 10% move above an already attractive offer. If Yahoo! would once again reject a higher offer, Microsoft would then have more reason to go hostile by nominating a new slate of directors, the only real possible option given the poison pill in place at Yahoo!. In the end, Jerry Yang may be out, one way or the other. Either he sells his company to Microsoft, is taken over in a successful hostile bid, or wins the takeover attempt, only to see Microsoft walk away, leaving him and his shareholder holding a victory flag worth half its previous value.

Tickers: MSFT, YHOO

It looks like the Microsoft takeover attempt of Yahoo! has finally reach a point were it may in fact start destroying value for both companies. But then again, most mergers usually end up doing just that, so maybe they are just more efficient. Given the move in Yahoo! stock today, it appears that the market thinks a merger is still possible. Word on the street is that the $33 a share number is being thrown around again. Even though I originally felt somewhere in the $31-$35 range was likely, with $33-$35 being what was needed to get the deal done, I figured that was not possible anymore after Yahoo!'s less than stellar Q1 earnings.

Having said that, maybe Microsoft would be smart to pony-up and get the deal done before any more damage is done. Already today I have heard some analysts talking about how extra time will just result in further complications. One such complication is a common technique used by the takeover candidate for fending off the hostile bid - you simply begin worrying in public about the potential anti-trust problems with the merger. Of course, when a deal does get done (assuming it gets done), this will surly be brought up when regulators look at the deal. Another complication with waiting is the patience of the existing shareholders. At this point it is unclear exactly how many original shareholders are left, and how many shares are simply in the hands of the arbs, each of which will certainly expect to get paid. To make matters worse, it appears that many employees inside Microsoft are not excited about the possibility of a Yahoo! merger, not to mention the Yahoo! employees, many who have probably shed some of their shares, at least the shares they control and can sell without offending the higher-ups. Beyond potential job losses, integration of the two different (quiet different) corporate cultures is going to be difficult, to say the least. The number of these like-minded employees, on both sides, that decide to leave the companies will certainly continue to grow.

For some extra insight, Paul Kedrosky at the Infectious Greed blog also has some interesting and funny things to say about the potential merger, along with a link to a detailed analysis of any hostile takeover attempt. Potentially messy indeed.

Tickers: MSFT, YHOO

Yahoo! posted net income of $542.2 million, compared to $142 million a year ago. Nice increase? Well, not exactly, since $401 million of the gain was related to the IPO of Alibaba.com (better known as the kitchen sink). In other words, they made about what they did a year ago - they were flat. Flat is not good on Wall Street. To add insult to injury, international revenue fell 11%, while U.S. revenue was up 19%. Nice increase on the domestic side, but given that the U.S economy is slowing, 19% more of a shrinking share is not good. It looks like the "!" will need to be officially stripped from Yahoo! since the past excitement continues to be lost. Steve Ballmer and Microsoft now need to figure out whether they should continue to offer $31 a share. On the other hand, he is probably dancing something like he did at a past MSFT shareholder meeting, given that he and Microsoft are now back in the driver's seat, not that they ever left. I am really not sure what other cards Yahoo! has left to play. It is hard to see anyone else offering more the $31 a share, and also hard to see how Yahoo! can sustain even $28 if Microsoft were to walk away. Sure, Yahoo! gave good guidance, and mentioned how they are on track to doubling operating cash by 2010, but what do we really expect them to say? Those that bought the $30 and $32.5 calls this last week, hoping to see a huge quarter, followed by Microsoft capitulation and prostrating, are going to have to keep wishing. Their wishes may still come true, but the strategy payoffs are a little less guaranteed, especially with short-term options. Instead of being forced into submission, Ballmer is doing the dance once again, and Jerry Yang would be smart to join in. The Yahoo! board might also want to join the conga line as well - to keep wearing out the dance theme - since the shareholder activist and their lawyers are probably firing up the briefs as we speak.

Tickers: MSFT, YHOO

The Yahoo! earnings on Tuesday should prove to be interesting, regardless of whether they meet, beat, or miss expectations. If Yahoo! misses, the handwriting may be on the wall with regard to Microsoft's current takeover attempt and offer. On the other hand, Google's recent results illustrate that click numbers are not nearly as bad as everyone expected. If Yahoo! can show better than expected earnings and beat expectations, the pressure will be on Microsoft to increase its current offer (which is now valued slightly below the original $44.6 billion). Given what is at stake, you can expect Yahoo! to book and include every possible source of revenue in the first quarter. Ironically, in the end this may actually be what is best for Microsoft, allowing it to offer something north of $31 a share, maybe as high as $35 a share, while at the same time saving face as it justifies a higher offer. Let the drama begin, ..... again.

Tickers: MSFT, YHOO

Deal Journal over at the WSJ explores the valuation of various possible Microsoft, Yahoo!, News Corp, Google, AOL partnerships. Adding Google in the exercise is probably purely academic given that anti-trust regulations would preclude any potential Google-Yahoo alliance. Sanford C. Bernstein figures that a Yahoo-AOL-Google structure would increase the valuation of Yahoo! to $37.01 per share, after adding more than $550 million in earnings EBITA. Interestingly, the combined Yahoo!-AOL deal would be closer to $31.27 per share - with AOL on Google's platform - slightly north of the original offer from Microsoft. Of concern for current Yahoo! shareholders is that the terms of the AOL deal call for Yahoo! to buy back shares somewhere in the $30-40 per share range. Even with the $31 a share purchase price, the AOL dance may end up costing existing shareholders when, and if, any deal is made in the lower $30s.

Tickers: MSFT, YHOO, GOOG, TWX, NWS

As the MSFT-YHOO saga continues, it appears that more of the "strategy" is beginning to unfold. As we have discussed in other posts, the various players being talked about (News Corp, Google, Time Warner - AOL) could end up being components of any deal, but that may be secondary to the discussion. What each provides is leverage. In essence, Yahoo! wants a higher bid, but Microsoft does not want to bid against itself. Enter the new players. Without even making a real bid for Yahoo!, they give this appearance, or at least the illusion, of more value, allowing Microsoft to raise the stakes. Given recent developments, I would not be surprised to see Microsoft offer $33-35 a share, allowing everyone to be happy, go home, and avoid any more confusing partnerships - some of which may actually destroy value. The fact still remains that Microsoft needs Yahoo!, and Ballmer needs a win - all toes are too deep in the water already. The additional discussions have also given Jerry Yang the time to realize that his baby has grown up and is probably going off to college in Seattle. Always painful, but part of the process.

As was pointed out by a Bull Bear Trader reader, Google will probably be the winner in all of this. Notice that they really did not offer much, just enough to keep things interesting and honest, and more importantly, messy. I am sure they prefer two weaker search engines as competition, instead of one stronger one, but it may not matter in the end. As mention in the WSJ: "Google handily won the last phase of online competition focused on the small text ads tied to Web searches. Those ads account for roughly 40% of the U.S. online ad market." So successful is the search advertising, that even Yahoo! is farming out tasks to Google's AdSense.

Of interest in the WSJ article is how Google and its competitors are moving to display advertising, such as banner and video ads. Currently, these types of ads only account for about 30% of U.S. advertising dollars on the Internet. As viewers move from TV to the Internet, more advertising is also being placed on video sites, and sites for women's issues. Google dominates search advertising, but display advertising is still being fought over. Google's YouTube purchase, and Yahoo! recently introduced site Shine (see other posts, or http://shine.yahoo.com/), are well positioned. This is where a combined Microsoft, Yahoo!, and potential News Corp. agreement is critical. It could also allow News Corp. the opportunity to further leverage advertising at MySpace, beyond previous agreements with Google. Better opportunities (i.e. better profits) may be available, but integration will be challenging. Previous talks with partners have failed, and as mention, News Corp. may just be a secondary player in the current discussions.

Tickers: MSFT, YHOO, GOOG, TWX, NWS

It is amazing how fast things develop when it gets personal. The latest news from the WSJ reports that Yahoo! and Time Warner's AOL (which they may like to give away cheap, just to get it off the books and out of their memories) are close to a deal to combine Internet operations. Of course, Microsoft is developing its own battle plan, hooking up with News Corporation in an effort to possibly mount a joint bid for Yahoo! and its new partners - Google, AOL, .... and everyone else who hates MSFT. An interesting statement in the article is that "Microsoft and News Corp. have yet to reach an agreement on joining forces but one person apprised of the plan described the discussions as serious." Now why would the WSJ have the inside track on a possible MSFT / News Corp deal? Hmmmm.

Of interest is how AOL (aka Time Warner) would purchase shares of Yahoo! at a price above the Microsoft offering price. Essentially, AOL and some cash would come Yahoo!'s way. The deal would not include AOL's dial-up access business , and would value AOL at $10 billion (do they still have a viable dial-up business, and does anyone except the AOL dial-up or broadband folks go to the site?). Yahoo! would use the cash to buy back stock in the $30 to $40 range.

The question that gets lost in all this is whether all these partnerships are actually good for Yahoo! shareholders, or even Microsoft for that matter? Will the combined partnerships be worth more than $31 a share? Some analysts are already skeptical. Looking at the new proposed partnerships, Yahoo! seems to be getting the short end of the stick. AOL brings less to the table, other than a declining business, albeit a still significant number of eyeballs (still 4th overall with 109 million visits in February - although every time someone logs on the Internet - with either their AOL dial-up or broadband - they hit the site, even if they don't intend to, or plan to stay around). News Corp, on the other hand, brings an increasing social network to the plate with MySpace and their growing media presence.

At first blush it looks like Yahoo! is strategically placing itself in a position to command a higher bid, while Microsoft is setting up an alliance that will allow it to offer a higher bid. With a new partnership with AOL, Microsoft can rationalize a higher bid, and still save face (at least a little). In the end, everyone may realize that the $31 per share was a good price, and certainly less complicated for valuing the deal.

Tickers: MSFT, YHOO, GOOG, TWX, NWS

One of Yahoo!'s largest shareholders, Legg Mason (almost 7%, 2nd largest holding) said it is prepared to support Yahoo! in its effort to remain independent ........ should Microsoft lower its offer. Legg Mason portfolio manager Bill Miller goes on to say Microsoft blundered by threatening to offer a lower price, but that if Microsoft were to offer even $1 dollar more per share over the original $31, it would go a long way to appeasing shareholders. Translation: Please offer more, we have no other options. In fact, he does goes on to say that Yahoo! does not really have any other good options, but also that Microsoft needs the deal to happen. I still expect a slightly higher bid, and agreement. Of course, with Ballmer, you never really know.

In related news, analysts from Piper Jaffray Piper mentioned that their survey of 20 institutional Yahoo investors showed that a majority favor the current deal to no deal.

Tickers: MSFT, YHOO

Yahoo! executives reiterated today that the Microsoft takeover bid "substantially undervalues" the company. They did leave the door open by stating that they remain open to a deal if it "is superior to our other alternatives." Other alternatives? Such as the price dropping back into the teens with a bid withdraw? Such as Microsoft lowering their bid and taking an even more aggressive approach, such as nominating a new board? My guess is they are looking for a higher price, and Microsoft is likely to pay up, regardless of what each side is saying in public, but who really knows. With comments like "Moreover, Steve, you personally attended two of these meetings and could have advanced discussions in any way you saw fit," it is certainly getting more personal - which always complicates things.

Tickers: MSFT, YHOO

As reported in Bloomberg, and discussed earlier in this blog and elsewhere, Microsoft is finally putting the screws to Yahoo!, giving the search company three weeks to make a decision. Microsoft has furthered threatening to reduce its $44.6 billion offer, and, adding insult to injury, threatening to replace Yahoo!'s directors if they reject the negotiations. (As a side note: as good a businessman as Gates is/was, it is hard to image him taking this position, but it does not surprise me with Balmer - it must be the frantic "Dancing Ballmer" video that is still burned in my brain). If the negotiations break down, Microsoft will propose its own slate of directors and take the proposal directly to the Yahoo shareholders.

Once again, I think Jerry Yang has little choice, unless he can find a white knight from an ever shrinking pool. I am not sure anyone really wants to suit up to do battle against Microsoft in this case, even a somewhat weakened Google that would have too many anti-trust hurdles to jump over. Given that Microsoft took the NewCorp strategy (bid high enough - like in the WSJ acquisition - so that no one bothers to even consider stepping in the waters), also makes it unlikely that another bidder will appear.

Tickers: MSFT, YHOO, GOOG

Microsoft is evaluating its bid given that Yahoo! has lost value since Microsoft made its offering price. The lost value has not only been in share price, but also in lost personnel. Of course, what share value has been lost is to date only the value Microsoft injected into the market when it proposed a takeover for $31 per share.

As mentioned on Fast Money this evening on CNBC, Microsoft is taking the Oracle approach: 1.) make a hostile bid, 2.) wait for no other bidders to show up, 3.) apply pressure, 4.) threaten a lower bid, 5.) or even threaten to possibility walk away and simply buy the stock cheaper at a later date.

Jerry Yang is in a difficult position since his company is losing value everyday (lower share price and lower share of the market). While Yahoo! and its founders may hate to be taken over by Microsoft, shareholders will have a legitimate complaint if Microsoft gets frustrated and walks away, which will cause the stock to drop back into the teens. While Yahoo! may be delaying things in order to further examine their options, they are likely to find that they really don't have any, and are just left with a lower bid and frustrated shareholders. The chances of another company bidding against Microsoft are remote.

In the mean time, some traders have been writing $31 and higher calls against the Yahoo! stock that they already own. This allows them to generate income while they wait, and provide some additional downside cushion. The move seems safer everyday given that Microsoft seems less likely to substantially raise its bid (and if it does, they still get to sell their shares for $31). Of course, as with any covered call position, there is always the risk that the covered position will lose value. Such downside may be up to Jerry Yang, more than Mr. Softie, or the market.

Tickers: MSFT, YHOO