Microsoft Holders Moody After Yahoo! Reprise

Updated from 2:19 p.m. EDT

SAN FRANCISCO -- Microsoft(MSFT Quote) investors have taken a dim view of the company's proposal for an alliance with embattled Yahoo!(YHOO Quote).

In timing that positions Microsoft as a white knight instead of a nemesis, the Redmond, Wash., software company announced Sunday that it had proposed to Yahoo! "an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo!."

Investors took that to mean that a merger between the two, something Microsoft said it would not rule out, could still take place. In Monday trading, Microsoft's stock closed down 53 cents, or 1.8%, to $29.46, while Yahoo! was up 2 cents to $27.68.

Until Microsoft outlines the details of its latest proposal, investors are left to speculate how far-reaching a transaction would be -- and whether the companies would continue on joint or separate tracks.

The market is hoping Microsoft's latest proposal will lead to an acquisition, "but that's really a very premature conclusion," says Kevin Buttigieg of Stanford Group.

Microsoft's move is tactical rather than strategic, Buttigieg says. The software giant is attempting to prevent Yahoo! from turning to Google(GOOG Quote) to improve its cash flow, he said. Stanford makes a market in Microsoft and Yahoo! shares.

Yahoo! has been considering an arrangement to outsource its search advertising to Google.

"From Yahoo!'s standpoint, any arrangement with Microsoft could relieve pressure from the activist investors," Buttigieg says. Activist investor Carl Icahn launched a proxy fight Thursday to unseat Yahoo!'s board of directors at the upcoming shareholders' meeting. Yahoo! shareholders have criticized the company for failing to come to buyout terms with Microsoft in April.