For Yahoo, clock ticks down to Microsoft deadline

By Eric Auchard - Analysis

SAN FRANCISCO (Reuters) - Yahoo Inc (YHOO.O) faces a critical week that could decide whether the pioneering Web company can remain independent or must surrender to an unsolicited takeover by Microsoft Corp (MSFT.O).

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 stabilizing 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 (GOOG.O) 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 (TWX.N) 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?"