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After BEA Systems Inc. last year rejected a $6.6 billion takeover bid from Oracle Corp. and demanded sweetened terms, the database giant withdrew its $17 per share offer. The stock price of BEA, which had valued itself at $8.5 billion, promptly fell below the value of the initial deal. Yahoo! Inc. faces a similar predicament in its duel with Microsoft Corp. In the absence of rival bids to the $44.6 billion deal, the Sunnyvale, Calif., Internet company's best hope for drawing a better offer is to play on the software vendor's determination to complete the transaction. Push too hard, however, and Yahoo! risks seeing its shares crater should Redmond, Wash.-based Microsoft, like Oracle, summarily abandon the offer, especially if the U.S. economy weakens later this year, as expected. That puts Yahoo! leaders in a precarious position. "Microsoft's probably in a better position right now," said Ryan Jacob, portfolio manager with Jacob Internet Fund, one of Yahoo!'s largest shareholders. "It's a tough situation because Yahoo management would rather not sell, but if Microsoft offers a good price they don't have much choice." Jacobs added that the $31 per share offer from Microsoft is a "good price," but predicted that the company would boost the offer into the mid-$30 range to ensure good relations following a merger. "This is going to be a tough integration even if it's friendly, but it will be much tougher if it's hostile," he said. Microsoft's $31 per share offer on Feb. 1 represented a 62% premium over Yahoo!'s closing stock price of $19.18 the previous day. When Yahoo! rejected Microsoft's bid on Monday, the software company said it reserved the right "to pursue all necessary steps to ensure that Yahoo! shareholders are provided with the opportunity to realize the value inherent in our proposal." Although interpreted by some as an indication that the company would play hardball with Yahoo!, it may not have to. In a research report, Citigroup Global Capital Markets Inc. analyst Mark Mahaney on Tuesday speculated that Yahoo! stood only at 30% of making a strategic move to block Microsoft, while other analysts think Yahoo! has even less leverage. Adam Lehman, a former senior vice president of business affairs and development at AOL and a top dealmaker with the company, said talk of a Yahoo! merger with Time Warner Inc.'s AOL unit smacked of desperation and shows that "there aren't any compelling alternatives" for Yahoo! to the Microsoft bid. Yahoo! does have some strategic options, such as outsourcing its search operations to Google Inc. or seeking to extract more value from its Asian assets, including its stakes in Yahoo! Japan and Chinese Internet firm Alibaba.com, which Mahaney estimates to be worth $10.7 billion. But such deals would take time to put together and likely would not produce as much value as quickly as the Microsoft takeover. If Microsoft has the upper hand, however, analysts emphasize that it has its own reasons for wanting to accommodate Yahoo!. With Mountain View, Calif.-based Google pulling away from the field in online search and advertising, Microsoft must bolster its Internet properties, a key goal of CEO Steve Ballmer. And the company is shrewd enough to know that a merger will be integrated more easily if it does not follow a drawn-out hostile takeover that distracts managers from other duties and alienates Yahoo! workers, increasing their risk of flight to other companies such as Google. Even Oracle, which could have prolonged its battle with BEA, ultimately chose not to, agreeing in January to buy the company for $19.38 per share, $7.2 billion, which represented a compromise between it and BEA. Likewise, most analysts predict Microsoft will raise its bid for Yahoo!. "We continue to believe that Microsoft is likely to sweeten its bid rather than pursue a full blown proxy fight, given the risk of key Yahoo! employees leaving the firm," Canaccord Adams analyst Peter Misek wrote in a research report, predicting Microsoft would ultimately pay roughly $35 per share for the company.  Deal Video
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