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Yahoo! Fails to Convince Street

Analysts say Yahoo!'s first-quarter results were not good enough to stop Microsoft from acquiring it.
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SAN FRANCISCO - Good, but not good enough.

That seems to be the general consensus on Wall Street one day after



posted a first-quarter earnings beat.

A blow-out would have given Yahoo! the proof it needed to convince Microsoft it is worth more than the $31 a share the software giant is offering in an unsolicited takeover bid.

But with revenues coming in at only $30 million more than what analysts had expected, and earnings topping estimates by just 2 cents, Yahoo! may be no better off than on Jan. 31, when Microsoft first proposed the merger.

"We believe YHOO shares will continue to trade in line with the high likelihood the company will be acquired," wrote analyst Marianne Wolk of Susquehanna Financial Group, which makes a market in Yahoo! shares. "In our view, the fundamental outlook for YHOO is essentially unchanged following the first quarter earnings release. Thus, we do not believe these numbers will lead to a sweetened offer from Microsoft."

Shares of Yahoo were down 1.2%, or 33 cents, to $28.21 in early afternoon trading.

Jeffrey Lindsay, an analyst for Sanford Bernstein, said Yahoo!'s first quarter may have prevented a coup de grace by Microsoft, "but this mediocre performance was probably Yahoo!'s best shot."

"Had management delivered any less, especially given the recent 1,000 staff headcount reduction (to be offset by 600 new hires) and the one-time windfall from the Alibaba IPO, the remaining staff would probably have already been preparing to report to Redmond," Lindsay wrote. Stanford Bernstein makes a market in Yahoo! shares.

Yahoo! benefitted from a non-cash gain in the first quarter of $401 million from, a Chinese ecommerce site in which Yahoo! has a 40% stake.

Lindsay added that the only recourse Yahoo! has left to prevent a Microsoft takeover is coming up with an alternative deal, which so far the Internet giant has failed to do.

The company has started outsourcing some of its online ads in the U.S. to


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as part of a two-week trial, but Yahoo! President Sue Decker noted in Tuesday's conference call with analysts that this would not necessarily lead to a permanent relationship.

Yahoo! has also been in talks with

Time Warner's


AOL but this too has not yielded anything concrete.

In the backdrop looms Microsoft's Saturday deadline, when the company demands some sort of deal with Yahoo! or else it will proceed with a proxy battle to oust Yahoo!'s board of directors. Microsoft will post its own earnings results on Thursday.

Lindsay noted that even Yahoo! best performing business -- its display ads -- may not be able to sustain growth. The company posted an 18% increase in revenue in the first quarter vs. last year, but Lindsay doubts how well it can continue to hold up in a tough macroeconomic climate.

"Much of this business is brand-based with long term contracts cancellable at the advertiser's option and in this market likely very difficult to replace," he wrote in his research. "We think Yahoo! is living somewhat on past contracts that could diminish or disappear with little warning."

Even so, Mark Mahaney, an analyst for Citigroup, which has an investment banking relationship with Yahoo!, pointed out in his research that results from both Yahoo! and Google in the first quarter may placate fears that online advertising fundamentals are softening. Last week, Google blew past first-quarter estimates, offering some reassurance that it can withstand weakness in the economy.

At the same time, Google's lead over Yahoo! is widening, leaving Yahoo! with fewer strategic options. And that may mean it has little other choice than to play nice with Microsoft.

Mahaney in his research wrote that Yahoo!'s public comments point to "a greater willingness to negotiate on price. We believe YHOO shareholders will benefit."

This week marks a big week for Internet stocks, with


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set to post results today after the closing bell. Next Thursday,

IAC/InterActive Corp.


will come out with its first-quarter earnings.