Yahoo Inc faces a critical week that could decide whether the pioneering Web company can remain independent or must surrender to an unsolicited take-over by Microsoft Corp
Yahoo is racing to forge a credible alternative that lets it stay independent or at least forces Microsoft to raise its $31 a share cash-and-stock bid, now valued at $42.8 billion. "Yahoo is willing to try things at the 11th hour, that it never felt the urgency to try," Sanford C. Bernstein analyst Jeffrey Lindsay said. "Shareholders win, either way." "They are coming up with some of their best stuff now," he added. "We just wish they had done these things last year."
When it reports first-quarter results on Tuesday, Yahoo has perhaps a last chance to demonstrate some financial strength and progress it has made in stabilising the company's Internet media and advertising business after two years of decline.
Mid-week, Yahoo is set to complete a test with Google Inc on whether Google should run a piece of its Web search ad sales, a move sources familiar with the talks say is part of a plan to merge with Time Warner's AOL and fend off Microsoft.
Time runs out by Saturday, the date Microsoft has set for Yahoo to accept the deal or face a drawn-out proxy battle by Microsoft to unseat Yahoo's board. Two weeks ago the software giant threatened to lower its offer if Yahoo did not conclude friendly merger talks with Microsoft by April 26th.
Yahoo's chief technology officer will use a speech on Thursday at the Web 2.0 Expo industry show to spell out a strategy to open up Yahoo services such as e-mail, news, sports and advertising to make them more relevant across the Web, not just for users drawn inside its own sites.
That same day, Microsoft reports its own quarterly results. The software giant is expected to show strong underlying fundamentals across its range of businesses.
DEADLINE? WHAT DEADLINE?
But despite mounting time pressures - and veiled threats by Microsoft to walk away from the deal if it drags on - Wall Street analysts say they expect neither side to blink.
Microsoft sees the massive merger as necessary for both to effectively compete with mutual arch-rival Google. But Yahoo has impressed many analysts by managing to cobble together a scenario where it might just drive off much-feared Microsoft. Some analysts argue Microsoft's pressure tactics could backfire and spoil hope of Yahoo's board agreeing to a deal.
"You don't win by dragging a company to the altar," Canaccord Adams analyst Colin Gillis said. "If you are going to pick a partner, treat them nice. Make them feel pretty."
Global Crown Capital analyst Martin Pyykkonen gives Microsoft more credit for how it has played the courtship game. Imposing a deadline was Microsoft's way of enticing Yahoo to talk: "Why else would Microsoft set a three-week deadline?"
But if the two do not reach a deal this week, the stand-off could drag on for months. Yahoo has until mid-July to hold its annual shareholder meeting - where Microsoft could propose its own slate of directors. "We do think the two sides will go up to the limit on the timing," Lindsay said. "Microsoft will most likely have to initiate a hostile bid."
Once Microsoft sets in motion a campaign to go directly to shareholders, Yahoo's response would be to come forward with its own plan to merge with AOL and turn over search ad sales to Google, arguing this has more long-term value, Lindsay said.
Youssef Squali of Jefferies & Co disagrees. Going hostile would alienate Yahoo employees and spoil the deal. Cutting the deal's price would lead to a protracted battle. Instead, he sees Microsoft sweetening its bid with an all-cash $31 offer. Some analysts don't see how Yahoo can make the economics of an alternate deal work. Internet stock valuations have suffered from a weak economy this year and Yahoo share's price, currently above $28, could fall below its $19 level of late January without the support of Microsoft's standing offer, they argue.
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