Yahoo! Plummets After Microsoft's Exit

Shares of the Internet company fall more than 15% after it rejects Microsoft's offer. Yahoo! CEO and co-founder Jerry Yang (above) tells investors the future is bright.
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SAN FRANCISCO -- The pressure is on for

Yahoo!

(YHOO)

to make it up to shareholders after botching a $47.5 billion deal with

Microsoft

(MSFT) - Get Report

.

Shares for the Internet giant were taking a nosedive after Microsoft officially withdrew its offer on Saturday, sending Yahoo!'s stock tumbling as much as 20% Monday morning before recovering some of its value. Shares were recently down more than 15% or $4.34, to $24.33.

Microsoft had upped its bid to $33 a share from its original offer of $31 a share, but Yahoo! held firm at $37 a share, resulting in the deal's eventual collapse.

Cramer: Yahoo! Is in the House of Pain

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Yahoo! Chief Executive and co-founder Jerry Yang, who had all along maintained that Microsoft had been undervaluing his company, issued a statement on Saturday seeking to assure shareholders that the future is still bright.

"I am incredibly proud of the way our team has come together over the last three months," he said. "This process has underscored our unique and valuable strategic position. With the distraction of Microsoft's unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history so that we can maximize our potential to the benefit of our shareholders, employees, partners and users."

It will take a lot more than that, however, to convince investors that Microsoft wasn't Yahoo!'s best option.

"Clearly we're disappointed," says Darren Chervitz, director at the Jacob Internet Fund, which has a position in Yahoo! "We do believe that the offer Microsoft presented, and certainly its revised upward bid, is going to be difficult for Yahoo! to replicate on its own in a reasonable amount of time."

Chervitz says he is not convinced that Yang ever wanted to sell Yahoo! to Microsoft and his views colored how the Sunnyvale, Calif.-based company approached the deal.

"He made it difficult for (Microsoft CEO Steve) Ballmer to come to an agreement and save face with his shareholders," he says.

Now Yahoo! is left to build back the company in the hopes investors will eventually agree that its hardball tactics to avoid a Microsoft merger were the way to go.

One of the options it had come up with as an alternative to Microsoft was outsourcing some of its U.S. search ads to its rival,

Google

(GOOG) - Get Report

. The two companies ran a two-week test but neither has provided details about the results.

Many analysts speculate that Yahoo! has a chance of saving itself by developing a longer-term partnership with Google, which would mean outsourcing even more of its search ads.

Citigroup analyst Mark Mahaney speculated that a Google-Yahoo! deal could fetch $1 billion in cash flow, which could be worth $6 a share for Yahoo!

"The Google deal is a real possibility," says Sanford Bernstein analyst Jeffrey Lindsay, whose firm makes a market in both Yahoo! and Microsoft. "We think that a deal will be done and it will secure Yahoo's future."

By outsourcing its ads, Yahoo! can increase both profit and revenue, then take that money and invest it in areas where it still has a chance against Google, like, for instance, ads on mobile devices, Lindsay says.

"Yahoo! is much more even in mobile search with Google," he says. "You might as well fight a battle you have a chance of winning."

But analyst Trip Chowdhry of Global Equities Research says he is hesitant to get behind a relationship between Yahoo! and Google, especially when neither company has revealed much information about the two-week test.

"Why should investors cheer it up when Yahoo! or Google hasn't put a dollar number on it?" Chowdhry says.

He adds that Yahoo! is better off going at it alone and should try to reinvent itself much like

IBM

(IBM) - Get Report

did -- even if it takes years.

"It is not a quick fix," Chowdhry says. "You should not hold Yahoo stock if you're in it for days, weeks or months."

Chervitz, however, sees Wall Street's patience with Yahoo! wearing thin.

"We're not a patient bunch," he says. "I find it difficult to believe Wall Street will be patient enough with Yang to do a long-term turnaround."

In fact, Chervitz maintains that the only positive thing to come out of this collapsed deal with Microsoft is that Yahoo! now sees that it cannot sit on its thumbs as its business stagnates.

"The good news, if there is good news, is now they cannot not act and cannot let the stock meander in the low 20s or wherever it ends up settling," he says. "Shareholders will not sit quietly if Yahoo! doesn't realize some of that value on its own. The market has prodded Yahoo! into a heightened sense of urgency."

As to whether Microsoft might come back at Yahoo! in the future depends on Yahoo!'s performance. Lindsay says that if the company can prove that its value is indeed worth $35 a share or higher, the deal with Microsoft is dead for sure.

"If, however, these guys don't have anything, the market direction will be negative and you could see Microsoft come back," he says.