Yahoo-Microsoft pact could lead to merger-analysts

NEW YORK, May 19 (Reuters) - A potential partnership deal between Microsoft Corp (MSFT.O: Quote, Profile, Research) and Yahoo Inc (YHOO.O: Quote, Profile, Research) 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: Quote, Profile, Research) 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.