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Microsoft's search numbers show need for Yahoo

The company has failed to make significant headway against Google on its own. Whether Yahoo is the answer is unclear, but it's the biggest option available.

The latest monthly market share numbers from Comscore show Microsoft still struggling just to tread water against Google.

While just a continuation of an existing trend, the market share figures highlight why Microsoft is so serious about buying Yahoo. It's not clear that Yahoo is the answer to all that ails Microsoft's online business, but it is the biggest option out there when it comes to boosting Microsoft's presence.

While Microsoft and Yahoo do well in areas like Web mail and instant messaging, it is search that pays nearly all the bills in the online world and both are having a tough time making inroads against Google.

And while Microsoft may need Yahoo, analysts are skeptical of Yahoo's bullish forecast for its business if it remains independent.

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D.A. Davidson analyst L. Alan Davis said in a research note on Wednesday that he doubts Yahoo's ability to grow its revenue 25 percent a year for the next two years and nearly double its operating cash flow.

"Yahoo is clearly doing what it believes is in the best interest of its shareholders: making the case for the highest valuation possible," he wrote. "We believe its 2009 and 2010 forecast is overly optimistic and assumes online advertising market share gains."

Although Microsoft's stock-and-cash offer has dipped from $31 a share to around $29 based on a drop in Microsoft's share price, Davis said it is still an attractive offer given that the markets have dropped significantly and Yahoo would likely be worth far less today had Microsoft not made its bid.

"Despite Yahoo management's contention that the (Microsoft) offer grossly undervalues the company, we believe that it should look even more attractive to (Yahoo) shareholders given the downturn in the market and lack of any viable alternative," He wrote. "Given the sizable premium, we believe the MSFT offer to be relatively firm, although it could increase the cash portion (now $15.50 per Yahoo share) to move the total consideration closer to the original $31 per share.

In any case, Davis argues there just aren't many alternatives for Yahoo and he puts the odds of a Microsoft-Yahoo deal getting done in some fashion at 80 percent.