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Yahoo-Microsoft pact could lead to merger-analysts

NEW YORK, May 19 (Reuters) - A potential partnership deal between Microsoft Corp MSFT.O and Yahoo Inc YHOO.O the companies revealed over the weekend may prove to be a stepping stone to an outright acquisition, analysts said on Monday.

UBS analysts said in a research note that the business discussions between Microsoft and Yahoo could be a prelude to an eventual outright acquisition offer because it was vital for Microsoft to acquire Yahoo on friendly terms.

“A near-term deal could act as an intermediate step that would go a long way toward testing the waters,” UBS wrote.

The brokerage said a Microsoft-Yahoo partnership is likely to focus on search advertising and should be seen as an alternative to a scenario in which Yahoo would outsource to Google Inc GOOG.O part of its Web search ad sales.

Stifel Nicolas argued that Microsoft may be seeking to buy Yahoo’s search and search-advertising business outright, leaving Yahoo independent but smaller, focused on display advertising and Internet media businesses.

Stifel analysts George Askew and Scott Devitt warned that Yahoo must reach a deal with either Google or Microsoft or face a bruising proxy battle with activist investor Carl Icahn, who is seeking to install his own slate of Yahoo directors.

Icahn launched a proxy campaign last Thursday to replace Yahoo’s board with directors who would reopen talks with Microsoft, saying Yahoo had acted irrationally in refusing the software company’s $47.5 billion bid.

The proxy battle “may ultimately drive a damaged Yahoo into Microsoft’s arms” at around $31 per share, Stifel said.

Microsoft made a $31-per-share cash and stock offer in late January. Earlier this month, Microsoft discussed raising that offer to $33 a share, but backed away after Yahoo management held out for $37 per share.

The software giant’s move to court Yahoo was likely to prompt the Icahn to press Yahoo to further pursue an alliance with Google, a person familiar with the billionaire investor’s thinking told Reuters on Sunday.

(Reporting by Eric Auchard; Editing by Steve Orlofsky)

((E-mail: eric.auchard@thomsonreuters.com)) Keywords: YAHOO MICROSOFT/

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