MS, Yahoo mull media partner options: Source

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San Francisco, July 3:: Squali said, adding that many investors have shorted Yahoo from the high $20s all the way down below $20.

Adding to the volatility were options investors who placed fresh bets Yahoo would be trading up to $27.50 by October, said analyst Rebecca Engmann Darst of Interactive Brokers Group.

THE WAITING GAME

Several financial analysts said a key detail in the Journal report was that Microsoft and Yahoo executives had sought to revisit the merger on May 17 -- two weeks after Microsoft walked away -- and that two Yahoo board members in the meeting had said they would settle for a merger worth $33-$34 a share.

On May 3, Yahoo rejected a $33-a-share Microsoft offer worth $47.5 billion, and earlier this week questioned whether the software maker was ever serious about a full-scale merger.

The source familiar with Microsoft's thinking confirmed that Yahoo had belatedly sought a deal in mid-May worth $33 to $34, but that Microsoft was no longer interested at that point.

The source said Microsoft executives considered the early May deadline as vital to winning regulatory approval before the end of the year -- when a new presidential administration arrives and months more delays would likely occur.

Microsoft also become convinced that Yahoo executives were passively resisting the deal and unwilling to seriously negotiate. Meanwhile, the economy has taken a toll on the online ad market, and with it, the value of buying Yahoo.

"Microsoft is going to let Icahn do the dirty work and hand Yahoo over to them," Jefferies & Co's Squali said, adding that it was in Microsoft's interest to hang back and let Yahoo shares settle lower as investors quit betting on a takeover premium.

In the long run, however, Microsoft needs Yahoo more than Yahoo needs Microsoft, he argued.

"Microsoft has a gaping hole in its strategy and it's called the Internet and it's only getting worse because Google is encroaching on Microsoft's business," Squali said.

Separately, the US Justice Department is pursuing a formal antitrust investigation into a deal reached last month between Yahoo and Microsoft-archrival Google Inc to team up on Web search advertising.

Google, with more than 60 per cent of the Web search market, and Yahoo, with 16.6 per cent, agreed to a deal for Google to run search ads on Yahoo's site in a partnership that could mean $250 million to $450 million in new cash flow for Yahoo.