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Maybe Yahoo! Needs Microsoft, After All

Stocks in this article: YHOO MSFT

Internet giant Yahoo! (YHOO) reports its second-quarter results Tuesday as talk of a possible Microsoft (MSFT) deal again resurfaces.

Yahoo! board member Carl Icahn has again been urging the Internet firm to forge a search deal with Microsoft, and there have also been rumblings that senior Microsoft executives are on board.

Last year Microsoft launched a $47.5 billion bid for Yahoo! that ultimately collapsed, although there is growing speculation that the firms will now reach some form of search deal.

"The company's long-term prospects remain positive due to management focus on streamlining the business, Yahoo's intrinsic asset value and a potential partnership with Microsoft," wrote Youssef Squali, an analyst at Jefferies & Company, in a note released this week.

AT&T and Yahoo! Need New Mojo

Yahoo!, which is expected to launch a new homepage today , is currently locked in a battle with rival Google (GOOG) to win Internet hearts and minds.

Given the state of the economy, however, Squali expects Yahoo! to post "muted" second-quarter results, with both search and display advertising under pressure from macro headwinds.

Yahoo!'s Owned and Operated (O&O) search business will show a mid-single digit year-over-year decline, according to Squali, thanks to stiff competition from Google. The firm's display business will also feel the effects of pricing and volume pressure and cuts in branding budgets, he added.

Analysts surveyed by Thomson Reuters expect Yahoo! to post revenue of $1.14 billion and earnings of 8 cents a share, down from $1.8 billion and 9 cents a share in the same period last year.

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