Yahoo shares plunge after Microsoft's exit

By Tiffany Wu and Michele Gershberg

NEW YORK (Reuters) - Yahoo Inc's (YHOO.O: Quote, Profile, Research) shares tumbled as much as 20 percent on Monday after Microsoft Corp (MSFT.O: Quote, Profile, Research) 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: Quote, Profile, Research) 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: Quote, Profile, Research) AOL.