By Jason Simpkins
In an e-mail to employees, Chief Executive Officer Jerry Yang said the company had a "wide range" of options to consider before pursuing its "transformation strategy." However, in a note to clients, Citigroup Inc. (C) analyst Mark Mahaney said that it is reasonable to assume that Microsoft will be willing to increase its offer in coming weeks.
"In a hostile deal, the acquirer usually does not lead with its best and final offer and we would not be surprised to see Microsoft sweeten the pot somewhat to make the decision easier for Yahoo's board," the note said.
According to Citi, there is a 40% chance that Microsoft will raise its bid if Yahoo! rejects its initial offer. The bank gives a 20% probability that Yahoo! will accept the current bid as is, and a 25% chance that that Yahoo will hire Google (GOOG) to run its web search operations. Yahoo! may also solicit rival offers from Rupert Murdoch's News Corp. (NWS) or Comcast Corp. (CMCSA)
Microsoft made an offer of $31 a share to Yahoo! last week in hopes of uniting the second and third-largest search providers to take on Google, which has a commanding share of the market.
Google drew 56% of U.S. web search traffic in December, nearly double the combined share of Yahoo! and Microsoft, which attracted 18% and 13%, respectively.
Microsoft expects that in taking over Yahoo!, it will benefit from economies of scale in the online advertising market, as well as greater operational efficiency, and the pooling of engineering and creative talent.
Citi said that Microsoft is eager to siphon off Yahoo's Internet advertising abilities, and that those synergies would ensure the deal's value even at a higher bid.
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