Wall Street reacted like nothing happened.
Microsoft to raise the price of its takeover offer for Yahoo but may have been just good enough to keep the software giant from lowering its bid.
"Investors needed an 'aha' moment today," said analyst Anthony Valencia of TCW Group in Los Angeles. "Yahoo didn't provide it."
Yahoo's stock price dropped slightly in after-hours trading after falling by a penny to $28.54. Microsoft shares, which had lost 17 cents to $30.25 in regular trading, ticked up slightly.
Valencia and other analysts say it now appears more likely that the standoff between Yahoo and Microsoft will drag on, perhaps into summer. That would hand a clear advantage to Google, which benefits from its two rivals' distraction.
Microsoft has imposed a Saturday deadline for the two companies to negotiate an agreement. The Redmond, Wash., company has threatened to launch a proxy fight to oust Yahoo's board and perhaps lower its price if Yahoo doesn't agree to a deal. Yahoo's board has twice spurned Microsoft's unsolicited takeover offer, saying it undervalued the company.
In a conference call with investors, Yahoo Chief Executive Jerry Yang argued his case yet again for the Internet pioneer's bright future while underscoring that it remained open to "any and all" alternatives that recognize the Sunnyvale, Calif., company's "full value" -- including a deal with Microsoft.
Microsoft wants to buy Yahoo to challenge Google in the online advertising market, and especially in Web search. Microsoft CEO Steve Ballmer says the Jan. 31 cash-and-stock bid for Yahoo, initially valued at $44.6 billion, or $31 a share, is generous. Microsoft's stock decline has lowered the deal's value to about $43 billion.
"We think we can accelerate our strategy by buying Yahoo and will pay what makes sense for our shareholders," Ballmer said Tuesday before the company's earnings were released. He was earlier in Morocco, where Microsoft was launching its Web portal for North Africa.
Yahoo said its revenue increased 9% to $1.82 billion from a year earlier, toward the upper end of its forecast of $1.68 billion to $1.84 billion.
Profit was $542 million, or 37 cents a share, up from $142 million, or 10 cents, a year earlier. That included a noncash gain of $401 million from the initial public offering of China's Alibaba.com. Yahoo holds a minority stake in Alibaba Group.
Excluding that gain and other items, Yahoo's earnings would have been 11 cents a share, exceeding analysts' forecasts of 9 cents a share. Yahoo maintained its revenue projections for 2008.
"This wasn't stand and deliver; this was more like kneel and deliver," Canaccord Adams analyst Colin Gillis said.
But, he added, it could have been worse.
"The $31-a-share bid from Microsoft is the best thing that ever happened to Yahoo," Gillis said. "It seems to have reinvigorated the company and has given the management purpose with an 'us against them' mentality. They are adding value as opposed to destroying value."
The only firepower remaining in Yahoo's arsenal is to come up with a viable alternative, Sanford C. Bernstein analyst Jeffrey Lindsay said. Yahoo was close to a deal two weeks ago to join with Time Warner Inc.'s AOL, with Time Warner receiving a roughly 20% stake in the combined entity and Yahoo buying back billions of dollars in stock, people familiar with the matter said.
At about the same time, Yahoo began a test to outsource some of its search ads to Google. Yahoo President Susan Decker said Tuesday that it was too early to speculate on whether Yahoo would form a permanent pact with Google.
In the meantime, Microsoft's offer is the best on the table, Valencia said.
"Investors can be emotional but they are not sentimental, and there's a big difference there," he said. "They are not going to stick around and say, 'We really don't like the thought of Yahoo being gobbled up by big, bad Microsoft so let's give them some more time.' They don't care about that. They are strictly concerned with locking in their returns."
Reuters was used in compiling this report.