(Agencies)
Updated: 2008-02-09 16:06

Yahoo may be especially reluctant to accept the initial bid because Microsoft offered $40 per share just a year ago, according to a person familiar with the earlier discussions between the two companies. The person asked not to be identified because the bid was never made public.

Terry Semel, then Yahoo's chief executive officer, spurned Microsoft because he believed the company was about to start making more money from a new formula for delivering text-based ads to search requests.

Although the overhaul has produced more ad commissions, the improvement hasn't been enough to offset other weaknesses that have caused Yahoo's profits to fall for five consecutive quarters.

Yahoo co-founder Jerry Yang replaced Semel as CEO eight months ago, but so far hasn't been able to deliver on his repeated promises of a turnaround.

Analysts estimate Microsoft could raise its Yahoo offer to as much as $35 per share.

Yahoo shares gained 16 cents to close at $29.20 Friday while Microsoft shares gained 44 cents to close at $28.56.

If it resists Microsoft, Yahoo might have to embrace an idea that analysts have been promoting for months - an advertising alliance with Google, the Internet search leader.

Under this scenario, Yahoo would have to swallow its pride and acknowledge that it will never be as successful in the lucrative field of online search advertising as its once-smaller rival.

If it joins the thousands of other Web sites that depend on Google for search advertising, Yahoo would likely be able to boost its profit by hundreds of millions of dollars annually. But the partnership might face antitrust problems because Yahoo currently runs the second-largest search advertising system behind Google, raising the prospect of reduced competition unfairly driving up prices.

Similarly, a Microsoft-Yahoo combination will face antitrust hurdles.

If Google takes control of its search business, Yahoo would no longer need several thousand workers and probably would fire them to help boost the company's stock. The Google-induced layoffs would likely be made in addition to the 1,000 job cuts that Yahoo announced just before Microsoft made its bid.

Jettisoning so many workers figures to be difficult for Yang, who fought back tears when Yahoo laid off 650 workers in 2001 amid the ruins of the dot-com bust.

Microsoft also plans to cut jobs from Yahoo's 14,300-employee payroll, although its executives haven't specified how many people would be let go. A person familiar with Microsoft's plans said the company believes many of the Yahoo workers whose jobs are eliminated after a takeover would be offered new assignments in the combined company.

"One of the reasons Microsoft wants Yahoo is because of all the talented people there," said the person, who didn't want to be identified because of the sensitivity of the matter.

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