Microsoft seen as winner for Yahoo

Yahoo may have played its top two cards by pulling out possible deals with AOL and Google, but it does not seem to have changed Wall Street's view that Microsoft will eventually win the takeover battle.

Yahoo announced on Wednesday a test to outsource web search advertising to Google. Sources say the test is part of a planned three-way alliance to combine Yahoo with Time Warner's AOL instead of Microsoft.

But hours later, the world's largest software company appeared to trump Yahoo's announcement as the New York Times reported that Rupert Murdoch's News Corp was in talks to join Microsoft's $42.3 billion (£21 billion) bid for the web pioneer.

"Everyone is just exploring. The best option is to accept the Microsoft deal," said fund manager Mike Binger at Thrivent Financial in Minneapolis, which owns small stakes in Yahoo and Microsoft.

Mr Binger said an AOL-Yahoo merger made no sense. "I just see Yahoo as a mature brand and AOL as a declining brand," he said. As of December 31, Thrivent owned about 1.5 million Yahoo shares, or 0.11 per cent, and about 6.3 million Microsoft shares, or 0.07 per cent, according to regulatory filings.

Yahoo directors meet to discuss the Microsoft offer and alternatives to it as many as three times a week. A source familiar with the board's deliberations said any big decisions would likely only happen after the company's quarterly earnings report on April 22. Microsoft's cash-and-stock offer now values Yahoo at $29.33 per share, which the web company rejects as too low. But before Wednesday, Yahoo appeared to have run out of alternatives to Microsoft, which threatened last weekend to lower its bid if it was not accepted within three weeks, or April 26. Yahoo is now nearing a deal with Time Warner to fold AOL, excluding its dial-up internet access business, into a combined company, sources familiar with the talks said.

A deal would value AOL at $10 billion, with Time Warner kicking in some cash in exchange for 20 per cent of the combined unit. Yahoo would use the cash and other funds to buy back several billion dollars in stock at a price near the middle of a range between $30 to $40 a share, a source familiar with the plans said on Thursday.

"The structure of the AOL deal is likely to be less appealing to Yahoo shareholders than the straightforward Microsoft bid," Jefferies & Co analyst Youssef Squali said. "We believe that a 'clean' acquisition of Yahoo by Microsoft is still the most likely scenario."

A joint Microsoft-News Corp. bid could create a more formidable competitor to Google by uniting three of the biggest website publishers: Yahoo, Microsoft's MSN and News Corp's MySpace social network.