Yahoo shares plunge after Microsoft's exit

NEW YORK (Reuters) - Yahoo Inc's (YHOO.O) shares tumbled as much as 20 percent on Monday after Microsoft Corp (MSFT.O) withdrew its $47.5 billion takeover offer, wiping about $7.6 billion off the Internet company's market capitalization and piling pressure on its leadership.

In the aftermath, Internet search leader Google Inc (GOOG.O) seemed poised to reap the gains of the missed deal, which would have been one of the biggest mergers in the technology sector and may have threatened Google's steady expansion on the Web.

Microsoft shares rose 2.6 percent on relief that it was not willing to overpay for Yahoo, while Google rose 2.2 percent.

"The terminated Microsoft/Yahoo negotiations eliminate the risk for now of a stronger online advertising competitor to Google," Stifel Nicolaus analysts George Askew and Scott Devitt wrote in a research note. They raised their price target on Google to $675 from $610.

Yahoo has been testing an advertising partnership that would give arch-rival Google part of its search listings. While some on Wall Street see this is a potential way out for Yahoo, it also represents a new fringe benefit to Google.

The collapse of talks between Microsoft Chief Executive Steve Ballmer and Yahoo CEO Jerry Yang prompted Wall Street brokerages to cut their ratings and price targets on Yahoo, which held out for a $37 per share value despite a sweetened off from Microsoft for $33 per share.

Shares closed at $19.18 on January 31, the day before Microsoft made its unsolicited offer for Yahoo. Yang, one of Yahoo's founders, owns about 4 percent of the company.

Analysts expect a flurry of shareholder lawsuits against Yahoo management, even as the Web pioneer pursues possible deals with other Internet media and advertising companies, such as Time Warner Inc's (TWX.N) AOL.

Yahoo is also likely to push for the Google partnership, sources familiar with the matter said. That should boost Yahoo's operating performance in the near term, but runs the risk of regulatory scrutiny over an alliance between the Internet's top two players.

"Yahoo's execution remains the problem, as the company has not been able to execute better targeting and measurement on its own site effectively enough over the past 15 years," UBS analyst Heather Bellini wrote in a note to clients.

Bellini said she would not give Yahoo "the benefit of the doubt that they can make meaningful improvement over the next three years," especially as the break up of talks creates an even more competitive backdrop for Yahoo, Microsoft and Google.

Some of Yahoo's shareholders have already started to make their discontent public.

Bill Miller, a portfolio manager for Legg Mason, Yahoo's second-largest shareholder, told the New York Times on Sunday that he would have considered selling to Microsoft for $34 or $35 a share.

While that was more than Microsoft's offer, it was less than the $37 per share Yahoo's board insisted on.

"There is going to be a lot of pressure on Yahoo's management to deliver in the next year or two," Miller said, according to the New York Times.

Yahoo shares fell 15 percent, or $4.43, to $24.24 after initially falling as low as $22.97. Google shares rose $12.99 to $594.28, while Microsoft shares jumped 57 cents to $29.81 on the Nasdaq.

(Editing by Maureen Bavdek and Derek Caney)