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Yahoo wrestles with bid options

SAN FRANCISCO – Microsoft Corp.’s $41 billion takeover bid appears to have backed Yahoo Inc. into a corner, leaving the struggling Internet pioneer with the unpleasant choice of selling to a detested rival or pursuing other agonizing alternatives likely to require the help of an even fiercer foe, Google Inc.

At least that appeared to be the consensus emerging among analysts Monday as Wall Street awaited Yahoo’s response to last week’s unsolicited offer from Microsoft.

Yahoo says its board is going to take its time reviewing Microsoft’s bid along with other options that could keep the Sunnyvale-based company independent.

“At the end of the day, I don’t think they are going to be able to turn down Microsoft,” predicted technology investment banker Peter Falvey of Revolution Partners, echoing a widely held sentiment.

But if Yahoo spurns Microsoft, analysts believe it probably will have to swallow its pride and forge an advertising partnership with Google if the alliance could win antitrust clearance.

Under this scenario, Yahoo would rely on Google to run its search engine while joining thousands of other Web sites that depend on the Internet search leader for a steady stream of ad revenue generated from text-based links that produce commissions with every click.

But getting Google’s advertising help probably wouldn’t be enough to trump Microsoft’s offer by itself. To placate shareholders, Yahoo probably would have to line up enough money to pay a special dividend or perhaps even take the company private in a leveraged buyout.

Going private might be even more painful for Yahoo’s 14,300 employees than a sale to Microsoft.

To help repay the more than $20 billion debt that would be incurred in a leveraged buyout, Yahoo would likely have to fire about 4,500 employees, or 31 percent of its work force, Stifel Nicolaus analyst George Askew estimated Monday. Yahoo also probably would have to sell about $12.5 billion worth of investments in several promising Internet companies, including and Yahoo Japan.

Like most analysts, Askew still believes Yahoo will wind up in Microsoft’s clutches because the world’s largest software maker appears to be a determined bidder with more financial firepower than just about every other conceivable suitor.

The list of so-called “white knights” willing to come to Yahoo’s rescue appears to be dwindling. Several of the most logical candidates, including News Corp., AT&T Inc. and Comcast Corp., reportedly have no interest in trying to top Microsoft’s bid.

Should Yahoo resist, Microsoft could still turn up the pressure by drawing upon its $21 billion in cash and lofty market value of $285 billion to raise the bid.

Despite its vast resources, Microsoft expects to finance part of the Yahoo takeover with debt, the company’s chief financial officer, Chris Liddell, said at a Monday investment conference. It will mark the first time that Microsoft has had to borrow money to finance an acquisition.

Some analysts believe Microsoft could end up paying as much as $35 per share – a huge premium from Yahoo’s stock price of $19.18 before the saga began.

Yahoo shares rose 95 cents to close Monday at $29.33 while Microsoft’s shares fell 26 cents to $30.19, leaving the value of its cash-and-stock offer at $41.3 billion, or $28.71 per share, down from $44.6 billion, or $31 per share, when it was first made.

The threat posed by a Microsoft-Yahoo combination continued to hurt Google’s shares, which fell $20.47 to finish at $495.43. The decline left Google’s stock price 34 percent below its peak of $747.24 reached three months ago.