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By Dawn Kawamoto, 5 November 2008 09:05

NEWS

Yahoo! shares edged up Tuesday as analysts and the company's own major shareholder and director Carl Icahn said they longed for the internet search pioneer to entertain a search-only deal with Microsoft.

That recommendation followed reports Monday that Yahoo! and Google have dramatically watered down their initial search advertising proposal, as a means to gain approval from federal antitrust regulators.

Analysts with Sanford C Bernstein said in a research note that Yahoo! should dump its Google deal and turn its attention back to Microsoft, which previously had offered as much as $33 per share for the entire company and later came back with a search-only acquisition offer. Both deals were rejected by Yahoo!.

"We think the Google and Yahoo! proposal to the [Department of Justice], as reported in the press, to limit the deal to 25 per cent of Yahoo!'s paid search revenues and to reduce the term of the deal from 10 years to two years is a desperate gambit that is likely to fail.

"We expect the DOJ to defer a decision to next year and believe they are preparing for an antitrust showdown with Google. We expect the Google-Yahoo! deal to flounder, leaving Yahoo! unable to acquire AOL's portal and stuck in a standalone value trap," said the analyst.

It added: "Under these circumstances we think that Microsoft might come back in the new year with a reduced bid in the region of $20 per share."

And the analyst is not alone in its hope for a Microsoft comeback.

Yahoo! shareholder and director Carl Icahn, appearing Monday on CNBC, reiterated his hope of a Microsoft-Yahoo! deal: "I have said publicly and will continue to say it...I believe, as a large shareholder...that eventually Yahoo! should, if it's available, make a deal with Microsoft to sell the search business."

And while he doubts Microsoft is interested in buying all of Yahoo!, Icahn noted Yahoo! could "save a fortune" if Microsoft operated its search business.

While the Redmond giant has yet to make any public moves in that direction, its CEO Steve Ballmer is still keeping an eye on the company. Just last month, Ballmer said during a Gartner keynote presentation that an acquisition of the company "still made sense" for Yahoo! and Microsoft shareholders.

That sent Yahoo!'s share price on a rocket ride before Microsoft issued a statement that there were no talks going on between the companies and that the software giant had no interest in acquiring Yahoo!.