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Analysts don't rule out a Microsoft-Yahoo deal just yet

Despite Yahoo's formal announcement that buyout talks with Microsoft are kaput, analysts are skeptical, as shares continue to fall amid the announcement of a search ad deal with Google.

Updated June 13 at 8:35 a.m. PDT with analyst comments on the Google-Yahoo search ad deal.

Shares of Yahoo continued to get hammered in early-morning market trading on Friday, in a sign that its Google search ad announcement wasn't enough to boomerang its share price northward following Microsoft's exit from buyout talks.

Yahoo was down 6.46 percent to $22 a share in early morning trading. On Thursday, Yahoo ended the day at $23.52 per share, down more than 10 percent.

But the market reaction that Microsoft has left the building and thrown away the key is not entirely held by analysts.

Yahoo on Thursday announced that talks had broken off with Microsoft to sell its search business to the software giant and that it entered into a search advertising deal with Google.

Yahoo investors had been holding out for a Microsoft deal, which previously included an offer by Microsoft to buy Yahoo for $33 a share. That offer was subsequently withdrawn in May, after three months from the time that Microsoft launched its initial unsolicited offer for Yahoo at $31 a share.

Here's a few of analysts comments:

Jim Friedland, analyst, Cowen & Co.:

• We're not coming back to the table...No...We mean it this time...The search deal does not 'preclude a subsequent change of control,' which allows Yahoo to continue negotiations with Microsoft. The two companies have been negotiating since January 2007, and they continued to negotiate after Microsoft withdrew its bid in early May. A deal is less likely than it was a few weeks ago, but not impossible. Microsoft holds most of the cards and could hold out for a lower price. After all, its bid has dropped from $40 to $35 to $33 (via $31) over the past year.

Benjamin Schachter, analyst, UBS Securities:

• As far as its impact on a potential MSFT deal, unfortunately, there are really two ways to look at it:

(1) The discussion around the deal confirms that MSFT was not willing to reconsider its offer for all of YHOO.

(2) YHOO actually signing a deal with GOOG may push MSFT into a corner where it will have no choice but to finally follow through with a hostile bid.

We continue to believe that, at some point, MSFT will acquire all of YHOO. Unfortunately, for all of us that are beyond tired of the constant news flow and speculation around a possible MSFT/YHOO deal, this GOOG/YHOO agreement will not put us out of our misery as we still think MSFT needs YHOO.

Sandeep Aggarwal, analyst, Collins Stewart

• Is MSFT/YHOO likely combination or part transaction over? We would not rule out the possibility of MSFT/YHOO combination or part transaction even though GOOG/YHOO search deal may be starting in the next 3 1/2 months. Why? Because our view is that MSFT does not have compelling Plan B in search and YHOO may experience investors' pressure.

The continued sell-off in Yahoo's shares comes despite the Internet search pioneer's announcement after the markets closed Thursday that it had entered a nonexclusive search advertising agreement with Google.

Google was up 2.37 percent to $566.08 a share in early-morning trading.

Microsoft, which has seen its share price slide by as much as 16 percent since it , rose 3.68 percent to $29.30 a share. On Thursday, after the regular session closed, Microsoft had jumped 4.1 percent to $28.24 per share. The software giant's investors were apparently pleased that even the scaled-back partial deal to only buy Yahoo's search business was nixed.

In evaluating the overall benefit of a Yahoo-Google deal, analysts were mixed on the upside Yahoo would receive in the end.

"We think the deal is clearly beneficial to Yahoo in the short term, as it increases cash flow and potentially allows Yahoo access to insights into Google's monetization engine that Yahoo could mimic. However, the obvious question is, at what long-term cost?," Schachter wrote in his research note. "It weakens its position as a text ad provider for affiliates and potentially drives more advertisers to go directly to Google. It also calls into question Yahoo's focus on providing an integrated offering."

And Friedland from Cowen notes that Yahoo's financial fundamentals are expected to remain challenged, despite the Google deal.

Yahoo faces such hurdles as continuing market share loss in search to Google, a decline in user interaction with non-search areas of its site, and its display advertising could be "highly exposed to a slowing economy," Friedland noted in his research note.

Analysts such as Friedland, meanwhile, were cautiously optimistic that antitrust regulators would allow the Yahoo-Google deal to proceed.

"Since the market--not Google--determines keyword pricing, we believe there is a good chance the deal will make it through. However, given the combined search share of Google (and) Yahoo, we believe regulatory scrutiny is highly likely," Friedland states in his research report.

Stanford Group analysts said their preliminary view on the Yahoo-Google announcement is that regulators would likely lean toward clearing the deal. Reasons they cited included discussions the companies have already had with the Department of Justice during, and following, their two-week search advertising-outsourcing test, as well as the recognition regulators give to any efficiencies created in the market by having two competitors work together.

According to Stanford Group analysts Paul Gallant and Paul Glenchur: "Our very preliminary reaction is that the (Justice Department) should be inclined to clear the deal. But we caution that potential opposition from Microsoft and other influential players has yet to be aired."