Shares of Yahoo Inc. [YHOO] are trading modestly higher this morning at $28.03, aided by an upgrade from Citigroup Inc. analyst Mark Mahaney, who has upgraded the stock rating from a "hold" to a "buy." In a research report, Mahaney notes that at its closing price of $27.52 on Monday, Yahoo! traded at a 6% discount to Microsoft Corp.'s [MSFT] current half-cash, half-stock offer (valued at $29.37) and an 11% discount to its original $31 per share offer (value of the deal is now lower due to a decline in Microsoft's share price).

Mahaney continues to view a sale of Yahoo! to Microsoft at a price higher than the initial $31 bid as the "most likely outcome." How much higher? Well, his new price target is $34 a share, or a 23% discount to its closing price Monday.

Mahaney doesn't see Microsoft walking away from the deal, noting that the company "has yet to demonstrate traction" in online advertising, despite making it a key strategic priority, and that rival Google Inc. [GOOG] just strengthened its online display advertising position with the acquisition of DoubleClick. He also points out that deal multiples of other online advertising properties, including aQuantive (by Microsoft), 24/7 Real Media Inc. (by WPP Group plc) and Digitas Inc. (by Publicis Group SA) all support a higher price for Yahoo!.

Finally, while there may not be any competing bidders for Yahoo!, Mahaney believes the company is still aggressively pursuing strategic alternatives, including a tie-up with Time Warner Inc. [TWX], in which Time Warner would exchange its online content assets for a stake in Yahoo!. If Yahoo! does have other options, he opines, it could force a higher bid from Microsoft. - David Shabelman

See March 25 post from All Things Digital
See March 19 post from Tech Confidential