By Yi-Wyn Yen

Google may be getting cold feet. In a last-ditch effort to avoid a merger with Microsoft, Yahoo said it was considering teaming with Google in a search advertising deal. But some Google executives are now questioning whether that’s a good idea, the Wall Street Journal reported Thursday.

One major hurdle: A Google-Yahoo tieup could face tough scrutiny from regulators in Washington and the European Union. Last month Yahoo (YHOO) ran a two-week test displaying some of Google’s (GOOG) search ads on Yahoo’s homepage. Both Yahoo and Google executives said the experiment went well. The two are reportedly in talks to outsource Google’s search technology in a non-exclusive arrangement.

Spokespeople from both Google and Yahoo declined to comment.

Google may have wedged its way into the mix in order to break up Microsoft (MSFT) and Yahoo. Microsoft CEO Steve Ballmer admitted that Google was a factor when the software giant walked away from its $47.5 billion offer last Saturday. In a letter to Yahoo CEO Jerry Yang, Ballmer said his company would not be willing to deal with the “host of regulatory and legal problems” that it would inevitably inherit if Yahoo partnered with Google.

Last month Microsoft’s general counsel Brad Smith lashed out at the two big Internet sites for partnering even in a limited test. He argued that a Google-Yahoo combo would give Google a 90% share of online search advertising and that “this would make the market far less competitive. It would be fair to say that Microsoft would aggressively lobby against a long-term partnership between Google and Yahoo.

Microsoft was one of Google’s biggest detractors when the search giant said it was going to buy DoubleClick, the top firm in online display advertising. Google got approval from both the Federal Trade Commission and the European Committee to acquire DoubleClick, but the approval took the big G nearly a whole year.

Both the FTC and the European Committee ruled that text-based search advertising and display advertising, which is the preferred way that big brands like to advertise, are two different markets, and therefore the merger was not anticompetitive. But regulators may be more wary if the two biggest players in search want to team up.

“Google has incredible chutzpa,” said Jeffrey Chester, the executive director of the Center for Digital Democracy. The public interest group had opposed Google’s DoubleClick deal because it would give Google an overwhelming lead in online advertising.

Chester said both Microsoft and Google have approached him to support their political message on the Hill. He has not yet endorsed either party, and is waiting for a deal - whether it’s Microsoft and Yahoo or Google and Yahoo - to be announced.

However, Chester said he is wary of a Google-Yahoo tieup. “Whatever happens, we don’t want Google to operate Yahoo out of its back pocket,” Chester said. “Whether or not regulators do something about it, we’ll do something.”

By Yi-Wyn Yen

The deadline that Microsoft set three weeks ago for Yahoo (YHOO) to accept its buyout offer passed this weekend without either side making a move. While some analysts expect Microsoft to launch a hostile bid, it’s possible that CEO Steve Ballmer will follow through on his threat and walk away from the deal.

The three-month-old battle between Microsoft and Yahoo could come to a head fast. Yahoo has repeatedly rebuffed Microsoft and demanded a higher price - step that Ballmer has said he won’t take.

Earlier news reports indicated that Yahoo’s board of directors would meet on Sunday to consider their options, but there was no official confirmation of a meeting. The Wall Street Journal reported Monday that Microsoft and Yahoo did not have direct contact over the weekend. Microsoft could move as early as Tuesday, according to the Journal.

At stake is Microsoft and Yahoo’s ability to compete with Google as billions of advertising dollars continue to flood the Internet. As Google has risen to become the dominant online ad player, Microsoft and Yahoo have both struggled to gain traction. Most analysts think a merger is the best way for Microsoft and Yahoo to compete with Google.

Microsoft kicked off the battle in late January when it made an unsolicited cash-and-stock bid for Yahoo that was originally valued at $31 a share, or $45 billion. The deal’s value has since dropped to $29.64 as Microsoft’s shares have fallen.

While Microsoft and Yahoo executives have met to discuss the bid, Yahoo has so far spurned Microsoft. Yahoo CEO Jerry Yang has said he’s not opposed to a Microsoft buyout, but argues that the offer “substantially undervalues” Yahoo. To force Microsoft (MSFT) to up the ante, Yahoo has discussed a variety of tieups with Time Warner, News Corp. and Google in recent months.

“Our board and management team continue to be open to any and all alternatives, including a sale to Microsoft,” Yang said last week, when Yahoo reported first-quarter earnings that beat estimates.

Talks between Microsoft and Yahoo have been anything but friendly. Three weeks ago, Microsoft CEO Steve Ballmer issued the ultimatum that expired Saturday. On Thursday, when Microsoft also reported better-than-expected profits, chief financial officer Chris Liddell voiced his frustration with Yahoo’s recalcitrance - and suggested the company’s prepared to go to war or walk away.

“Unless we make progress with Yahoo towards an agreement by this weekend, we will reconsider our alternatives,” said Liddell, suggesting that Microsoft will makes its decision know next week. “The transaction has been anything but speedy as is being characterized by what would appear to be [Yahoo's] unrealistic expectations of value.”

Now that Yahoo has missed Microsoft’s deadline, one of the following three scenarios is likely:

• Microsoft turns up the heat and launches a proxy battle. The company has already hired a proxy firm and reportedly nominated candidates to an alternative board of directors. That slate would come up for a vote at Yahoo’s annual shareholder meeting, sometime before the end of July. (In an attempt to stymie Microsoft, Yahoo delayed its original March 14 shareholder meeting and has not yet announced a new date. According to Yahoo’s bylaws, however, the company must hold the meeting every 13 months, which means by the end of July.)
• Microsoft walks away. The Journalreported that this seems unlikely, although abandoning the bid could increase the pressure on Yahoo to come to the negotiating table. If Microsoft drops its bid for Yahoo, the company is likely to continue acquiring online ad companies. In the past 11 months, Microsoft has spent more than $6 billion to acquire aQuantive and Rapt.
• Status quo. Microsoft extends the proxy deadline while Yahoo tries to convince its shareholders that an alliance with Time Warner’s AOL or Google is more desirable.

Microsoft CEO Steve Ballmer doesn’t want to bid against himself by upping the original deal. Photo courtesy of Microsoft.

It’s not clear how much Microsoft could accomplish without Yahoo. Ballmer clearly sees Yahoo as the ammunition he needs to take on Google as online advertising spend skyrockets. According to eMarketer, advertisers worldwide spent $41 billion online in 2007 — a figure that is expected to double through 2011 as advertisers chase after consumers who are spending more time on the Web and less time watching TV, reading newspapers or listening to the radio. Google controls 40% of the overall market while Yahoo and Microsoft’s MSN have 15% and 5.2%, respectively. Google commands an even greater share in the lucrative search-ad business, with 58.7% of the market compared to 18.1% for Yahoo and 12% for MSN, according to the latest Nielsen data.

Microsoft fears that Google, with its March acquisition of DoubleClick, the world’s biggest online ad server company and big player in the increasingly lucrative market for online display ads, will seize an even bigger portion of the ad market as MSN falls further behind.

Microsoft isn’t the only one worried about Google. A number of media and Internet giants are now circling Yahoo — one of the last independent large-scale online players. “Microsoft’s forcing…everyone to make a move,” says Frank Addante, CEO of Rubicon Project, which helps publishers manage their online ad inventory.

Time Warner (TWX), which owns Fortune.com and CNNMoney, has pursued a deal that would fold AOL into Yahoo in exchange for a 20% stake. Along with aligning with AOL, Yahoo is also looking into outsourcing search advertising to market leader Google (GOOG). Last week Yahoo finished a two-week test that ran Google ads for searches on Yahoo’s homepage. The Justice Dept. is reportedly investigating the test for possible antitrust violations.

News Corp. has approached the deal from different angles. Yahoo and Rupert Murdoch’s News Corp. (NWS) held preliminary talks about a possible partnership after Yahoo rejected Microsoft’s bid. When those discussions stalled, News Corp. began talking with Microsoft about a three-way alliance that would combine News Corp.’s social networking site, MySpace, MSN and Yahoo.

Many analysts argue that ultimately a Microsoft-Yahoo combination is the best option for Yahoo shareholders — and for Microsoft in its war with Google. Wrote Bernstein Research analyst Jeffrey Lindsay in a note to investors on Friday: “We expect the acquisition scenario to play out before the end of July (the theoretical outer limit for the Yahoo! shareholder meeting) and think the outcome is very likely to be a sale to Microsoft at a slightly improved price.”

By Scott Moritz, writer

There may be more than money to consider in the Microsoft-Yahoo standoff.

Microsoft (MSFT) has given Yahoo a deadline of Saturday to accept its buyout offer (or, presumably, at least at start serious talks) or risk triggering a hostile takeover battle. Yahoo wants a higher offer — a demand that Microsoft has so far rebuffed.

But the focus on price may be missing a key subtlety behind the impasse.

One possible stumbling block might be Yahoo CEO and co-founder Jerry Yang’s role in a combined company. As displeased as Yang may be by the prospect of joining forces with Yahoo’s culturally-mismatched rival, some observers say he could be open to a leadership role in the merged Internet division.

“I’ve always believed Jerry Yang wants do something bigger with Yahoo,” as opposed to watching it dissolve into the works of a bigger company, says an analyst who has known Yang since Yahoo went public in 1996. ”He’s Jerry Yahoo, that’s really who he is.”

Yahoo has been exploring other options, including a possible tie up with the AOL division of Time Warner (TWX) and an advertising partnership with rival Google (GOOG) to help outsource some of its ads and trim costs. But almost any type of hookup between the No.1 and No.2 online ad giants seemed fraught with antitrust concerns.

Without a better offer in sight, Yang and the board will likely have to sit down with Microsoft over the weekend and negotiate. If Microsoft told Yang that he would play a top role in the combined company, it might sway the Yahoo founder, says the analyst, who did not want to be identified.

“He’s already a billionaire,” adds the analyst, referring to Yang. “What he wants is his brand to be massive. When the history of the Internet is written it will feature names like [Amazon (AMZN) chief Jeff] Bezos, [Google CEO] Schmidt, Page, [AOL founder Steve] Case. Yang wants to be there.”

Stay tuned.

Yahoo has until Saturday to accept Microsoft’s offer. Courtesy of Yahoo.

By Yi-Wyn Yen

The Microsoft-Yahoo standoff could get ugly fast.

Saturday is the deadline that Microsoft set three weeks ago for Yahoo (YHOO) to accept its buyout offer - or face the possibility of a hostile bid or a decision by Microsoft to abandon the deal altogether. The April 26 deadline brings to a head three months of high-profile jockeying during which Yahoo has repeatedly rebuffed Microsoft and demanded a better price.

At stake is Microsoft and Yahoo’s ability to compete with Google as billions of dollars worth of advertising dollars continue to flood the Internet. As Google has risen to become the dominant online ad player, Microsoft and Yahoo have both struggled to gain traction. Most analysts think a merger is the best way for Microsoft and Yahoo to compete with Google.

Microsoft kicked off the battle in late January when it made an unsolicited cash-and-stock bid for Yahoo that was originally valued at $31 a share, or $45 billion. The deal’s value has since dropped to $29.64 as Microsoft’s shares have fallen.

While Microsoft and Yahoo executives have met to discuss the bid, Yahoo has so far spurned Microsoft. Yahoo CEO Jerry Yang has said he’s not opposed to a Microsoft buyout, but argues that the offer “substantially undervalues” Yahoo. To force Microsoft (MSFT) to up the ante, Yahoo has discussed a variety of tieups with Time Warner, News Corp. and Google in recent months.

“Our board and management team continue to be open to any and all alternatives, including a sale to Microsoft,” Yang said on Tuesday, when Yahoo reported first-quarter earnings that beat estimates.

Talks between Microsoft and Yahoo have been anything but friendly. Three weeks ago, Microsoft CEO Steve Ballmer issued the ultimatum that expires Saturday. On Thursday, when Microsoft also reported better-than-expected profits, chief financial officer Chris Liddell voiced his frustration with Yahoo’s recalcitrance - and suggested the company’s prepared to go to war or walk away.

“Unless we make progress with Yahoo towards an agreement by this weekend, we will reconsider our alternatives,” said Liddell, suggesting that Microsoft will makes its decision know next week. “The transaction has been anything but speedy as is being characterized by what would appear to be [Yahoo's] unrealistic expectations of value.”

If Yahoo doesn’t accept Microsoft’s offer by the Saturday deadline, one of the following three scenarios is likely:

• Microsoft walks away. In this case, Microsoft will likely continue to spend money acquiring other online ad companies. In the past 11 months, Microsoft has spent more than $6 billion to acquire aQuantive and Rapt.
• Microsoft turns up the heat and launches a proxy battle. The company has already hired a proxy firm and reportedly nominated 10 candidates and three alternates to its own alternative board. The Wall Street Journal reported that the 10 nominees include former Nextel CEO John Chapple, former Grey Global Group CEO Edward Meyer, former Adelphia Communications chief financial officer Vanessa Wittman, and Jaynie Studenmund, a former executive at Overture Services, the online ad company acquired by Yahoo.
• Status quo. Microsoft extends the proxy deadline while Yahoo tries to convince its shareholders that an alliance with Time Warner’s AOL or Google is more desirable.

Microsoft CEO Steve Ballmer doesn’t want to bid against himself by upping the original deal. Courtesy of Microsoft.

Microsoft clearly needs Yahoo. Ballmer sees the No 2. Internet portal as the ammunition he needs to take on Google as online advertising spend skyrockets. According to eMarketer, advertisers worldwide spent $41 billion online in 2007 — a figure that is expected to double through 2011 as advertisers chase after consumers who are spending more time on the Web and less time watching TV, reading newspapers or listening to the radio. Google controls 40% of the overall market while Yahoo and Microsoft’s MSN have 15% and 5.2%, respectively. Google commands an even greater share in the lucrative search-ad business, with 58.7% of the market compared to 18.1% for Yahoo and 12% for MSN, according to the latest Nielsen data.

Microsoft fears that Google, with its March acquisition of DoubleClick, the world’s biggest online ad server company and big player in the increasingly lucrative market for online display ads, will seize an even bigger portion of the ad market as MSN falls further behind.

Microsoft isn’t the only one worried about Google. A number of media and Internet giants are now circling Yahoo — one of the last independent large-scale online players. “Microsoft’s forcing…everyone to make a move,” says Frank Addante, CEO of Rubicon Project, which helps publishers manage their online ad inventory.

Time Warner (TWX), which owns Fortune.com and CNNMoney, has pursued a deal that would fold AOL into Yahoo in exchange for a 20% stake. Along with aligning with AOL, Yahoo is also looking into outsourcing search advertising to market leader Google (GOOG). Earlier this week Yahoo finished a two-week test that ran Google ads for searches on Yahoo’s homepage. The Justice Dept. is reportedly investigating the test for possible antitrust violations.

News Corp. has approached the deal from different angles. Yahoo and Rupert Murdoch’s News Corp. (NWS) held preliminary talks about a possible partnership after Yahoo rejected Microsoft’s bid. When those discussions stalled, News Corp. began talking with Microsoft about a three-way alliance that would combine News Corp.’s social networking site, MySpace, MSN and Yahoo.

Many analysts argue that ultimately a Microsoft-Yahoo combination is the best option for Yahoo shareholders — and for Microsoft in its war with Google. Wrote Bernstein Research analyst Jeffrey Lindsay in a client note Friday: “We expect the acquisition scenario to play out before the end of July (the theoretical outer limit for the Yahoo! shareholder meeting) and think the outcome is very likely to be a sale to Microsoft at a slightly improved price.”

Microsoft (MSFT) signaled its ready to play hardball with Yahoo (YHOO) in its bid to acquire the Internet giant, and antitrust regulators are scrutinizing a trial advertising partnership that Google (GOOG) and Yahoo recently struck.

Microsoft put some substance behind its threat to take its three-month-old buyout offer to Yahoo shareholders by naming 13 people as potential candidates to the company’s board, according to Thursday’s The Wall Street Journal.

The list includes former Nextel Partners CEO John Chapple; Edward Meyer, former chief of Grey Global Group; Jaynie Studenmund, the former chief operating officer at Overture Services, a company Yahoo acquired a few years ago; and former Adelphia Chief financial officer Vanessa Wittman, the Journal reported.

Microsoft’s tougher stance comes amid news reports that the Justice Department is looking into Yahoo’s outsourcing of some of its advertising to Google. The companies’ two-week trial ended Wednesday. Yahoo has said it involved about 3% of its search results.

Yahoo has been looking for ways to reduce the cost of operating its search service and, in an effort to thwart Microsoft, to demonstrate it can thrive as a standalone business. But the cooperation between the No.1 and No.2 two search engine shops immediately raised anticompetitive flags when the pact was announced earlier this month.

Google says it “informed the Justice Department before we launched this test, and we have been responsive to their questions about it,” according to the Los Angeles Times. Yahoo said it too had given the Justice Department a heads up prior to the test, according to the Times report.

Microsoft has given Yahoo until Saturday to come up with a counter proposal or answer to its $43 billion takeover offer.

By Yi-Wyn Yen

Google’s shares have lost a third of their value since the start of the year, and concern is growing whether the small text ads Google serves are partly to blame. That will be one of the top things Wall Street will pay attention to when Google (GOOG) reports earnings Thursday after the close of trading.

“Revenue growth and paid clicks. That is what is on everyone’s minds,” says Imran Khan, an Internet analyst with J.P. Morgan.

In late February, comScore released a controversial report that had many analysts convinced that Google was not immune to a recession. The comScore report suggested that Internet users in the United States were clicking on Google ads less frequently. Some analysts began slashing their price target on Google, which gets 97% of its revenues from online ads, after the report showed that Google’s ‘paid clicks’ were flat in both January and February from the same period a year ago.

Tuesday evening comScore issued its latest report that showed Google’s paid clicks grew 3% in March year-over-year. But this time, analysts remain more cautious of the comScore’s numbers and warned investors against reading too much into the data. “We…believe that it is most useful for spotting trends,” wrote UBS analyst Ben Schachter in a report.

Is the slowing growth of Google’s paid clicks due to a weaker economy or because the company is actively managing the volume of its own ads? Google, which does not give forecasts for future performance, has said it is the latter and it is working on weeding out the poor quality clicks.

If that is the case, Google will still have to prove that its quality control initiatives translated into higher-revenue growth for the first quarter. Google believes that by placing fewer ads, it will be able to charge higher rates per ad.

Schachter is skeptical that the revenue generated by fewer, higher-quality ads will make up the difference. “Google may have made some pricing improvements, but we don’t believe they will be enough,” he wrote.

“We simply disagree with the notion that pricing out the lower quality advertisers will somehow result in higher quality advertisers paying higher rates in the near-term,” he added.

Besides paid click revenue, there will be plenty of other topics to discuss about Google’s first quarter. In an effort to push for open standards among mobile operators, Google entered the 700 MHz spectrum auction. In the second half of the year, Taiwanese manufacturer HTC is set to release a handset that uses Android, Google’s own mobile operating system.

The search giant also closed its $3.1 billion acquisition of DoubleClick, the industry’s top ad server. Analysts will also pay particularly close attention to Google’s integration plans for DoubleClick. In April, Google laid off a quarter of DoubleClick’s 1,200 U.S. employees.

The DoubleClick deal is largely seen as a way for Google to grow its display advertising potential. Wrote Citi analyst Mark Mahaney, “We believe that traction with the DoubleClick deal - along with mobile Internet and YouTube monetization progress - can provide material stock catalysts” for the second half of 2008 and first half of 2009.

By Yi-Wyn Yen

Tick tock.

One week has passed since Microsoft CEO Steve Ballmer set a three-week deadline for Yahoo to accept the software giant’s $42 billion offer, yet the companies are no closer to reaching an agreement than they were last Saturday.

Should they fail to reach an agreement by April 26, Ballmer will mount a proxy fight to oust Yahoo’s board of directors. But before things get truly hostile, Microsoft (MSFT), will find ways tighten the screws on Yahoo (YHOO).

Analysts speculate that the most likely scenario is for executives from both parties to meet again for the first time since the letter went public and strike a deal.

While the software giant is debating bringing News Corp. (NWS) on as a bidding partner to buy Yahoo, the complexities of engaging three parties and reaching an agreement swiftly make that scenario unlikely. Despite all the numerous wheeling and dealing among Internet giants, “We still think Microsoft will prevail,” wrote UBS analysts Ben Schachter and Heather Bellini in a note to clients.

Yahoo, however, isn’t going down without a fight. The company publicly rejected Redmond’s initial offer to buy out the company at $31 a share because it is convinced the bid is too low. The shares are now valued at $29. In an effort to find white knights, Yahoo has sought a three-way alliance with Time Warner (TWX) (which owns Fortune and CNNMoney) and Google this week. Time Warner would offer cash and fold AOL into Yahoo in exchange for a stake. Yahoo meanwhile is testing Google’s search ad service.

Such an alliance is shaky at best. A Yahoo-Google combination may face regulatory problems. And Yahoo’s shareholders may not find a Yahoo-AOL deal nearly as attractive as a Microsoft-Yahoo offer.

Industry watchers believe that Yahoo’s latest efforts are pure posturing. “They are setting up a textbook case to attract a higher price from Microsoft. It’s a classic diversionary tactic,” says James Owers, a professor of corporate finance at Robinson College of Business at Georgia State. “They were probably very unhappy with Ballmer’s letter and raced off to have discussions with AOL. It’s an attempt to say, ‘Hey, don’t bully us and threaten us with a lower price.’ “

Microsoft could attempt to walk away from the bid in an effort to make Yahoo’s shares drop dramatically. Oracle CEO Larry Ellison employed a similar tactic when he pursued PeopleSoft. Yahoo’s stock has traded 51% higher on average than when it last traded at $19.18 prior to Microsoft’s offer. Microsoft is offering a bid that’s worth a 62% premium of Yahoo’s shares. But a scenario to arm-twist Yahoo could backfire. “It’s the most aggressive move to walk away and come back with a lower bid. That would get the egos on the Yahoo side pretty enraged,” Owers says.

Ballmer is determined to buy Yahoo, and most likely, will get what he wants even if he ultimately pays a little bit more. Some Wall Street analysts expect Microsoft to offer Yahoo between $32 and $35 a share. Ballmer has been vocal about his intent to catch up with Google in the online advertising market, and firmly believes that combining forces with Yahoo is the only chance Redmond has to succeed. Much like the way the company poured billions into its Xbox gaming division to compete with Sony Playstation, Microsoft will do the same to go after Google. Microsoft has $21 billion in cash and is willing to issue debt to finance the deal that’s worth more than $40 billion.

“Ballmer offered a 62% premium. He wouldn’t have done that if he was just kicking the tires around,” Owers says. “That’s considered a blowout bid. And a blowout bid bid signals a determination to prevail.”

By Yi-Wyn Yen

Yahoo and Time Warner’s AOL are negotiating a deal to combine their Internet operations, a source told Fortune.

The news was initially reported in the Wall Street Journal, which stated that Time Warner (TWX) would fold AOL into Yahoo and make a large cash investment for a 20% stake of the combined company. In return, Yahoo would repurchase several billions of its shares in the mid-$30 range. Time Warner is also the parent company of Fortune and CNNMoney.com.

For Microsoft, this means war. The Journal and New York Times have also reported that Microsoft (MSFT) is now in talks with News Corp. (NWS) for a joint bid for Yahoo. Last Saturday, Microsoft CEO Steve Ballmer sent a strongly-worded letter to Yahoo’s shareholders that it should accept its offer within three weeks or face a proxy fight to nominate a new board of directors.

Yahoo is also looking at a possible advertising deal with Google (GOOG). Just hours before the news leaked of Yahoo’s advanced talks with AOL, the Internet portal announced that it would run a preliminary two-week test to run Google’s search advertising.

Yahoo, which has rejected Microsoft’s bid worth $31 a share, is hoping that a partnership with AOL and a possible advertising deal with Google, will be a more attractive offer to its shareholders. There’s no guarantee that Yahoo’s shareholders will go along with the deal if Microsoft comes back with a higher offer.

Many industry watchers continue to believe that accepting a deal with Microsoft is the best solution for Yahoo. “We continue to believe reaching a mutual agreement with Microsoft would be the best way for Yahoo to potentially extract a higher bid,” wrote UBS analyst Ben Schacter in a note late Wednesday. “The alternative would be for Yahoo shareholders to tender, although this process would not be as expeditious as if the two sides were to come to terms, and could involve a lower offer price, making the battle potentially even more protracted.”

By Yi-Wyn Yen

Microsoft signaled Friday that it could rescind its offer to buy Yahoo at $31 a share.

Microsoft (MSFT) and Yahoo (YHOO) executives met earlier this week but the talks ended in a standstill. Microsoft execs, who had earlier hinted that they would not raise their bid, refused to pay the $40 per share that Yahoo demanded, a source familiar with the matter told Fortune.

A Yahoo spokeswoman declined to comment.

The source said that Microsoft doesn’t plan to revoke its offer, but is merely using a tactical maneuver called “market signaling” to put pressure on Yahoo’s board of directors. Microsoft is broadcasting to Wall Street that Yahoo’s stock would become vulnerable it if withdraws its bid.

The software giant has said that it does not need to raise its offer because it doesn’t believe Yahoo has any alternative but to accept the deal. Yahoo has repeatedly stated that Microsoft’s offer significantly undervalues the company and formally rejected the offer in February.

After Reuters reported Friday that Microsoft was “evaluating” its offer, Yahoo shares slipped 6% in after-hour trading. The software giant made its $44.6 billion offer on Jan. 31. The deal is now valued at about $42 billion.

By Yi-Wyn Yen

Alibaba Group, the Chinese Internet giant that is part-owned by Yahoo, is reportedly in advanced talks with investors to buy back the shares owned by Yahoo, according to a Wall Street Journal report.

Concerns of a Microsoft (MSFT) takeover have prompted Alibaba to look for possible buyers as the company prepares to maintain its independence. While Alibaba is not pushing for a Microsoft sale, the company believes it can invoke the “right of first offer” clause from its 2005 agreement with Yahoo (YHOO) to buy back Yahoo’s 39% stake. Although the Alibaba group is private, Yahoo’s stake in it should be worth upwards of $1 billion.

Alibaba’s move comes on the heels of Yahoo’s presentations with major shareholders this week. Yahoo executives are promoting some of its crown jewels, including its stake in Alibaba, to convince Wall Street that it’s worth more than Microsoft’s $31 a share bid. On Tuesday Yahoo released a rosy presentation that showed its plans to nearly double operating cash flow from $1.9 billion to $3.7 billion within three years. At $27.23, Yahoo’s stock fell by 1.5% in mid-day trading Wednesday.

UBS analyst Benjamin Schachter called Yahoo’s revenue projections for the next two years “very aggressive targets” and believes that an offer of $34 a share would be acceptable. In a note to clients he wrote, “We think the company hasn’t earned the benefit of the doubt given the operating history of the past few years.”

Meanwhile, Alibaba.com has lost nearly a fifth of its value since it listed in Hong Kong last November (that’s part of a broader market drop; the Hong Kong Hang Seng index is off some 30% from its November 2007 high). Though Alibaba.com, a business-to-business site that is part of Alibaba’s vast portfolio, reported profits that have more than quadrupled on Tuesday, the stock fell below its IPO offer price for the first time that day. Shares closed at HK $12.2o on Wednesday.