Forget big premium as Microsoft eyes Yahoo again

By Eric Auchard - Analysis

SAN FRANCISCO (Reuters) - While Yahoo Inc (YHOO.O) is busy pursuing an independent strategy, forces beyond its control leave it increasingly vulnerable to a fresh takeover bid by Microsoft Corp (MSFT.O) without the increased premium shareholders once hoped for.

Microsoft's initial unsolicited takeover bid was a half-cash, half-stock offer of $31 per share, for a value of $44.6 billion. Microsoft later raised it to a $33-a-share bid valued at $47.5 billion.

Yahoo stock now rises or falls on speculation about what price Microsoft may end up paying for it. Earlier this month, as hopes of a new bid evaporated, Yahoo shares fell to $19.59, near their level in January before Microsoft began its bid.

With Microsoft back in the picture as a potential acquirer, Yahoo shares traded up above $24 a share on Nasdaq on Tuesday.

Microsoft, rebuffed by Yahoo in its original takeover bid, said on Monday it had given up on negotiating with current management but was ready to instantly reopen talks if activist investor Carl Icahn wrests control of Yahoo's board at its annual meeting on August 1.

Also conspiring against Yahoo is a further decline in the U.S. economy and the online advertising market on which its revenue depends. Yahoo can only hold back or cut costs so far before having to lower its already weak outlook again.

"All this deal speculation is happening in the space of an increasingly dicey environment in terms of adverting," RBC Capital analyst Ross Sandler said. "If Yahoo starts missing its numbers, the stock moves back to $20," he said.

Wall Street is looking for revenue to grow 11 percent but profits to fall nearly 13 percent when the Internet company reports second-quarter results on July 22.