Yahoo! Rebuffs Microsoft's Advances

Though Yahoo!(YHOO Quote) appears to have gotten cold feet, Wall Street is still warm to the prospect of an acquisition by Microsoft(MSFT Quote).

Shares of Yahoo! slipped 2.4% to $30.23 in afternoon trading Monday, after speculation about an acquisition by Microsoft subsided. Early Friday, a media report that the two companies were discussing a merger sent shares of Yahoo! soaring almost 20%.

But the stock retreated to trade only about 7% higher than before the speculation began. Yahoo! shares gave back ground late Friday, after The Wall Street Journal reported that merger talks between the two companies were no longer active because of a lack of interest on Yahoo!'s part.

Still, while the chances of a merger seem more remote than they did just last week, the latest bout of speculation revealed that many investors and analysts would support the deal. And if Google(GOOG Quote) continues to turn up the heat on both companies, a deal would likely win even more support on Wall Street.

"The deal makes sense because a lot of Microsoft's strengths are Yahoo!'s weaknesses and vice versa," said Ryan Jacob, a portfolio manager at the Jacob Internet Fund, which counts Yahoo! as one of its major holdings.

Jacob says that Microsoft's strengths in technology would be complemented by Yahoo!'s media expertise. "For Yahoo!, competing against Google in terms of technology is becoming more critical. For Microsoft, creating significant new Internet properties remains a weakness."