April 7, 2008: 1:53 PM EDT
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Wall Street looks for Yahoo deal

Microsoft's ultimatum to Yahoo's board may signal a sweetened offer is in the offing.

By Scott Moritz, writer

(Fortune) -- A hostile bid, a nine-week stalemate, two rejections, some tough talk, a three-week deadline and soon ... a sweetened deal. At least that's the ultimate outcome some investors and analysts see for the Microsoft-Yahoo deal.

Two developments over the weekend have helped put Microsoft's $42 billion bid for Yahoo on track for some discussion. Microsoft (MSFT, Fortune 500) gave Yahoo (YHOO, Fortune 500) 21 days to come to the table or risk a proxy war and possibly a lowered bid. Yahoo shot back with its second rejection in the form of a we-are-open-to-discussions letter to Microsoft chief Steve Ballmer.

All this posturing has given analysts and some investors' more confidence that getting the deal done is merely a matter of finding the right price. Judging from previous deals, a hostile bid and tough talk can quickly dissolve into an amicable accord. Recent deal logic suggests that -- barring any first quarter shortfalls or newly dimmed outlooks -- Microsoft could raise its bid a customary 10% to make it happen. The original offer was a stock and cash deal at $31 a share, deal watchers say something closer to $34 a share is probably the right number.

Yahoo hasn't provided a counter proposal yet. But the board is under pressure to get the best price for the deal. Now, with Microsoft's deadline and its threat of "re-evaluating" the offer, directors face the prospect of the lowered bid. This wouldn't exactly be considered good maneuvering for shareholders interests. The tactic worked for Oracle (ORCL, Fortune 500) with its takeover of BEA, for example.

And Microsoft isn't likely to scuttle the deal, say analysts. Yahoo is the way Microsoft has decided to go strategically to broaden its Internet business and counter the Google (GOOG, Fortune 500) threat. To top of page

Microsoft's ultimatum to Yahoo's board may signal a sweetened offer is in the offing.