Yahoo! Inc. may end up kicking and screaming on its way to the altar, but still appears headed toward a marriage with Microsoft Corp.

The latest fling--which involved rumors this week that Yahoo! was courting News Corp. in a complicated alliance that also featured private equity involvement--was shot down in the market almost as soon as it was floated. In the deal, News Corp. would reportedly get a 20% stake in Yahoo! while handing off its MySpace social networking property to Yahoo!

For such a deal to fly, however, Yahoo! managers would have to show its value tops Microsoft's current $31 a share, $44.6 billion offer, or risk a revolt from shareholders and years in the courtroom defending their actions.

Yahoo! CEO Jerry Yang late Wednesday sent a letter to shareholders defending its rejection of the Microsoft offer. In the letter, Yang played up the business opportunities the company has and claims it is a "faster-moving, better-organized, more nimble company than it was just a few months ago," choosing words that also reflect most all of the criticisms he has faced as CEO.

A potential alliance with News Corp., an acquisition of at least part of Time Warner Inc.'s AOL LLC and a deal to outsource its search business with Mountain View, Calif.-based Google Inc. all have been floated  as alternatives to a Microsoft buyout over the past week. And while it is clear that Yang does not prefer a deal with Microsoft, those following the proceedings view the various alternatives as bargaining chips rather than viable options.

"This is Jerry Yang's baby, he founded it when he was in Stanford and this is probably not the ending he wanted to see," said Tom Taulli, founder of DealProfiles.com, an online service that tracks mergers and acquisitions. "But I don't know what he can do to untangle himself from this."

Morton Pierce, chairman of Dewey & LeBoeuf LLP's mergers and acquisitions group in New York, said Yahoo! will have trouble convincing shareholders that its alternatives are better than the Microsoft offer.

"I'm not questioning that they're not trying to find a viable alternative, but ultimately I don't see an alternative to sitting down and negotiating with Microsoft," he said.

Indeed, the real question might not be about whether the two sides will come together, but at what price. Money manager Bob Olstein, who owns around 1 million shares of Microsoft, this week sent a letter to Microsoft chief financial officer Chris Liddell, urging the company not to increase its bid.

Meanwhile, Legg Mason Capital Management Inc. chief Bill Miller, whose fund owns 83 million shares, or 6.3% of Yahoo!, said in a letter to shareholders this week that Microsoft will have to boost its offer in order to seal the deal.

Taulli argued that Microsoft should not bid against itself, and that the Redmond, Wash., company should take a page out of Oracle Corp.'s book in its pursuit of BEA Systems Inc. last year.

Redwood Shores, Calif.-based Oracle offered $17 a share, or $6.7 billion for BEA in October, then pulled its bid when BEA said it wanted $21 a share. Shares of San Jose, Calif.-based BEA slipped below $15 in January before the deal was revisited, with Oracle eventually agreeing to pay $19.38 a share, or $8.5 billion.  

"At the end of the day, I think it's not what Yahoo! wants to do, but what Microsoft wants to do," Taulli said. "The only way out is if Microsoft says they don't want to go hostile. If they're prepared to do a tender or proxy fight, I don't see how Yahoo! gets out of it."

Many analysts still expect Microsoft to bump up its offer in order to entice Yahoo! shareholders. -- David Shabelman