Yahoo says its board is going to take its time reviewing Microsoft's bid along with other options that could keep the Sunnyvale-based company independent.
"At the end of the day, I don't think they are going to be able to turn down Microsoft," predicted technology investment banker Peter Falvey of Revolutions Partners, echoing a widely held sentiment.
But if Yahoo spurns Microsoft, analysts believe it probably will have to swallow its pride and forge an advertising partnership with Google.
Under this scenario, Yahoo would rely on Google to run its search engine while joining thousands of other Web sites that depend on the Internet search leader for a steady stream of ad revenue generated from text-based links that produce commissions with every click.
But getting Google's advertising help probably wouldn't be enough to trump Microsoft's offer by itself. To placate shareholders, Yahoo probably would have to line up enough money to pay a special dividend or perhaps even take the company private in a leveraged buyout.
Going private might be even more painful for Yahoo's 14,300 employees than a sale to Microsoft.
To help repay the more than $20 billion debt that would be incurred in a leveraged buyout, Yahoo would likely have to fire about 4,500 employees, or 31 percent of its work force, Stifel Nicolaus analyst George Askew estimated Monday. Yahoo also probably would have to sell about $12.5 billion worth of investments in several promising Internet companies, including Alibaba.com and Yahoo Japan.
Like most analysts, Askew still believes Yahoo will wind up in Microsoft's clutches because the world's largest software maker appears to be a determined bidder with more financial firepower than just about every other conceivable suitor.
The list of so-called "white knights" willing to come to Yahoo's rescue appears to be dwindling. Several of the most logical candidates, including News Corp., AT&T Inc. and Comcast Corp., reportedly have no interest in trying to top Microsoft's bid.
Should Yahoo resist, Microsoft could still turn up the pressure by drawing upon its $21 billion in cash and lofty market value of $285 billion to raise the bid.
Despite its vast resources, Microsoft expects to finance part of the Yahoo takeover with debt, the company's chief financial officer, Chris Liddell, said at a Monday investment conference. It will mark the first time that Microsoft has had to borrow money to finance an acquisition.
Some analysts believe Microsoft could end up paying as much as $35 per share - a huge premium from Yahoo's stock price of $19.18 before the saga began.
Yahoo shares rose 95 cents to close Monday at $29.33 while Microsoft's shares fell 26 cents to $30.19, leaving the value of its cash-and-stock offer at $41.3 billion, or $28.71 per share, down from $44.6 billion, or $31 per share, when it was first made.
The threat posed by a Microsoft-Yahoo combination continued to hurt Google's shares, which fell $20.47 to finish at $495.43. The decline left Google's stock price 34 percent below its peak of $747.24 reached three months ago.
Merrill Lynch analyst Justin Post believes Yahoo should dangle the prospect of a Google partnership to persuade Microsoft to raise its bid and then accept the higher offer.
While a Google partnership could boost Yahoo's revenue by $500 million to $600 million annually, Post said Yahoo's brand will be better off with Microsoft. "It seems to us Google has its, not Yahoo's, best interests in mind," Post said.
Google already is attacking Microsoft's proposed takeover as a bad deal for consumers, arguing it could limit choice on the Internet.
Microsoft contends consumers and advertisers would be better off if it buys Yahoo because the combined company would pose a more formidable threat to Google's huge advantage in the Internet search and advertising markets.
Google Chief Executive Eric Schmidt reportedly has already contacted his Yahoo counterpart, Jerry Yang, to broach the possibility of an ad partnership - an alliance that some analysts had been advocating even before Microsoft made its bid.
Turning over search and a big chunk of advertising would be a humbling step for Yahoo. The company has invested more than $2 billion to develop its own search technology and adjoining advertising system during the past five years in a largely fruitless attempt to catch Google, whose success is one of the reasons that Yahoo's profits have declined for five straight quarters.
Yahoo gave Google one of its first big breaks in 2000 when it hired the Mountain View-based company to power its search engine. That partnership, which ended in 2004, didn't involve selling ads on Yahoo's site.
Even if Yahoo decided to work with Google again, the partnership might face antitrust obstacles, given that the two companies together control nearly 80 percent of the U.S. search market.
Microsoft, with just an 8 percent share of the U.S. search market, almost certainly would raise antitrust alarms if Google took over Yahoo's search engine, just as Google is already pushing regulators to take a hard look at Microsoft's takeover plans.
Google almost certainly can't try to buy Yahoo outright because of antitrust laws, but it might be able to make a small investment like the 5 percent stake that it bought in Time Warner Inc.'s AOL for $1 billion in 2005.
Yahoo's board conceivably could even turn down Microsoft on the grounds that the current offer grossly undervalues the company, given its stock traded as high as high as $34.08 in late October.
If Yahoo assumes that stance, it might provoke a showdown at its annual meeting in a few months. Microsoft has until March 13 to nominate its own slate of directors if it tries to seize control of Yahoo's board.
Yahoo also possesses an antitakeover provision, known as a "poison pill," that could be used to issue millions of new shares to make an acquisition prohibitively expensive. Triggering the poison pill almost certainly would infuriate already testy shareholders.
"Sooner or later, I suspect this is going to be taken directly to Yahoo shareholders," Standard & Poor's equity analyst Scott Kessler predicted. "And those shareholders are very disappointed with management's execution and the company's financial performance."
