Sanford C. Bernstein analyst Jeffrey Lindsay has been pushing for Yahoo! Inc. [YHOO] to outsource its search business to Google Inc. [GOOG] and merge with AOL LLC longer than anyone we know, but he still had to be surprised when Yahoo! announced earlier this week that it would start testing just such a search deal with Google and floated the possibility of a merger with AOL. And while Lindsay told us yesterday that regulatory issues would likely derail a full-blown search agreement between Yahoo! and Google, he was reserving judgment on the value of a merger with AOL until he was able to crunch the numbers. His conclusion: The Yahoo!-AOL proposal is a "viable alternative" to the Microsoft deal and in a "best-case scenario" could be more attractive than Microsoft Corp.'s [MSFT] current $31 per share offer.

What exactly is that scenario? For Yahoo! to merge with AOL and outsouce its  entire search business to Google. Under such an arrangment, Lindsay values Yahoo's shares at $37.01. If AOL would maintain its current search relationship with Google, but Yahoo! didn't, the value of the stock would be closer to $31.27 a share. In the "worst-case scenario" in which both Yahoo! and AOL declined to outsource search to Google (the most likely scenario, according to Lindsay), Yahoo! would be valued at $28.45 a share, which he says should form "the base level for any future bids for Yahoo! and is likely the minimum that investors should expect."

Most analysts are less optimistic about the prospects of a Yahoo!-AOL partnership, noting that investors favor Microsoft's offer. So where does it all leave us? Pretty much where we were before all the fireworks, though with Yahoo! in a slightly better position to get a little something more from Microsoft. -- David Shabelman 

See April 10 story from Tech Confidential
See April 10 post from Silicon Alley Insider
See April 11 post from All Things Digital