(Agencies)
Updated: 2008-02-02 17:49

Forrester Research analyst Charlene Li expects Yahoo to resist, predicting the company "will do everything possible to stay independent," even if it means swallowing its pride and rehiring Google to run its search engine and sell ads on its site.

A woman jogs in front of Yahoo! headquarters in Sunnyvale, California, February 1, 2008. [Agencies]

Other analysts still think Yahoo might try to line up a white knight rather than fall into Microsoft's clutches. Analysts mentioned several other potential suitors, including News Corp. and InterActiveCorp.

Dinosaur Securities analyst David Garrity even thinks it's possible that China's search leader, Baidu.com Inc., or Chinese e-commerce conglomerate Alibaba.com Inc. might bid for Yahoo. Alibaba.com is 40 percent owned by Yahoo.

In what most analysts regard as a long shot, there was even some chatter that longtime Microsoft rival Apple Inc. and its CEO, Steve Jobs, might come to Yahoo's rescue.

If push comes to shove, most analysts believe Microsoft will raise its cash-and-stock bid.

Investors appear confident an agreement eventually will be reached. Yahoo shares climbed US$9.20, or nearly 48 percent, to US$28.38 while Microsoft shares fell US$2.15, or 6.6 percent, to US$30.45 -- a sign that Wall Street is skeptical about whether the acquisition makes sense.

"It's a classic case of a buyer overbidding to blow any potential competitors out of the water," said James Owers, a Georgia State University professor of corporate finance.

Shortly after Microsoft disclosed its intentions, the US Justice Department said it is "interested" in reviewing antitrust issues. European Union officials declined to comment, but analysts said Microsoft probably will face more challenges getting a Yahoo acquisition approved in Europe than the United States.

Microsoft made its offer a few hours after Yahoo's chairman, Terry Semel, stepped down, removing a potential stumbling block. Semel had rejected Microsoft's takeover overtures a year ago while he was still Yahoo's chief executive, according to a letter released Friday.

Yahoo co-founder Jerry Yang replaced Semel as CEO nearly eight months ago while another Yahoo director, Roy Bostock, is now chairman.

Yang, a billionaire who is one of Yahoo's largest shareholders, isn't believed to have warm and fuzzy feelings about Microsoft. He has openly expressed his admiration for Jobs and last year even invited the Apple CEO to Yahoo's headquarters for a pep talk with employees.

Microsoft believes its technological expertise will be a good fit with Yahoo's knack for providing content and services that keep people coming back to its site. Combined, the two companies would reach a US online audience of 142 million compared with 124 million for Google, according to Nielsen Online.

But Yahoo and Microsoft are so far behind Google in the lucrative search market that they still will have a lot of ground to make up even if they joined forces.

Google already controls 62 percent of the worldwide search market, and has been widening its lead, according to the latest data from comScore Media Metrix. By combining, Microsoft and Yahoo would have a 16 percent share of the worldwide search market, the Web traffic tracking company said.

Google shares fell US$48.40, or 8.6 percent, to close at US$515.90 Friday, but the downturn appeared to be driven more by a disappointing fourth-quarter earnings report than by Microsoft's bid for Yahoo.

Besides helping to boost its online ad revenue, Microsoft believes it could mine more profit from Yahoo by jettisoning workers and eliminating overlapping operations.

Microsoft said it sees at least US$1 billion in cost savings if it buys Yahoo. Microsoft executives deflected questions about how many jobs might be lost, but the company emphasized retention packages will be offered to Yahoo engineers and other key employees, including some executives.

The fate of Yahoo's brand also is unclear if Microsoft takes over. Both Ballmer and Kevin Johnson, president of Microsoft's platforms and services division, hailed Yahoo's strong brand value but did not commit to keeping the name alive.

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