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Thursday, February 14, 2008

Analysts: Yahoo must now accept buyout bid if Microsoft raises price

A chorus of Wall Street analysts are urging Yahoo to take the deal, now that it's clear no other buyers are really emerging. But they're also saying it's time for Microsoft to raise its original offer for Yahoo in order to make it happen.

With Yahoo's other options on the wane, top Wall Street analysts including Yahoo's second-biggest investor are now warning Yahoo to accept Microsoft's buyout offer, if Microsoft is willing to raise it by just enough.

"We think this deal is a strategic imperative for [Microsoft] and that [Yahoo] is in a tough spot if it wishes to remain independent," according to Bill Miller, an analyst at US asset manager Legg Mason, a company that owns 80 million Yahoo shares, or 6% of the company.

Agreed Jordan Rohan, an analyst at RBC Capital: "Yahoo management has already exhausted the patience of its largest, longest-suffering shareholders, and Microsoft's offer allows them to save some face."

Citigroup -- whose analysts have literally been projecting odds about what will become of Yahoo -- this week upped the probability to 55% that Microsoft will increase its bid.

On Monday, Yahoo rejected Microsoft's initial bid of $31 per share, contending that it did not adequately assess Yahoo's value.

Meanwhile, the rumor mill continues to swirl around potential white knights. The list of names that have been bandied about now includes Fox Interactive's MySpace, along with Amazon.com and Time Warner's AOL division.

But financial analysts increasingly believe that no other company will be able to exceed Microsoft's bid, which is now valued at around $41.7 billion.

RBC's Rohan suggested in a note to clients that Yahoo's major shareholders will increase their pressure on their board to accept a tender offer, if Microsoft ups the price tag only a few dollars per share.

"We believe this this weekend's news signals that no competing bidder is likely to emerge, and that negotiations have officially entered the counteroffer stage," according to Rohan.

Even before Yahoo turned down Microsoft's initial offer, Legg Mason's Miller cautioned Microsoft that it will "need to enhance its offer if it wants to complete a deal."

In a quarterly letter to investors dated February 10 -- the day before Yahoo's rejection of the $31-per-share bid -- Miller estimated the fair value of Yahoo at almost $40 per share.

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