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Wall Street keeps cautious eye on Yahoo

Despite Microsoft's public willingness to potentially negotiate a deal with a new Yahoo board, investors remain cautious, with analysts largely keeping a "hold" recommendation on its stock.

Wall Street is largely keeping a cautious eye on Yahoo, despite Microsoft's announcement on Monday that it is interested in negotiating a possible buyout of Yahoo's search assets, or potentially making a renewed bid for the entire company.

Analysts, overall, still have a "hold" recommendation on the stock, according to Thomson Financial's survey of 34 financial analysts who follow the stock. Only one analyst has upgraded a recommendation on Yahoo in the past two weeks, raising it to a "hold" from a "sell" on June 25.

Nonetheless, Yahoo soared as high as 13 percent to $24.14 a share in early trading Monday, following Microsoft's announcement that it would support activist investor Carl Icahn's proxy fight to oust Yahoo's current board and negotiate a possible deal with Icahn's slate of dissident directors, should they be elected at Yahoo's August 1 annual shareholder meeting.

Wall Street analysts are more bullish on the notion that Icahn may prevail with his proxy fight, now that Microsoft has come out with a statement of support for his efforts and interest in negotiating with a "new" Yahoo board about a potential acquisition of the company's search business or a possible renewed bid for a buyout of the entire company.

"With his most recent statement, Icahn has effectively put tremendous pressure on (Yahoo CEO) Jerry Yang to maintain support of shareholders, given that Microsoft says it will not be able to reach a suitable deal with the current board," Gene Munster, a senior research analyst with Piper Jaffray, said in a research note.

Munster raised the prospect of an Icahn board gaining control to a 50 percent likelihood from a 30 percent chance.

"While talks with Ballmer and statements from Microsoft make voting for Icahn's board more attractive for the near term, we expect shareholders would like to see Icahn announce a CEO candidate or other operational plan for the future so that a Microsoft deal is not the only option," he added.

And while Microsoft in its statement said it would be interested in discussing either a partial asset acquisition of Yahoo or an entire buyout of the company, Wall Street places high expectations on a buyout of all of Yahoo.

"Throughout this courtship, our view has been, and continues to be, that at some point, Microsoft will acquire all of Yahoo, as we still think Microsoft needs Yahoo to gain scale in the online business and to compete effectively against Google," UBS analysts Bejamin Schachter and Heather Bellini stated in a research note.

The analysts added that they expect that an acquisition of the entire company would likely be in the range that Microsoft was previously willing to pay, which was initially a deal valued at $31 a share and later bumped up to $33 a share.

"We believe that an acquisition of the whole company is now likely in the $31 to $33 range, as we think anything less than $31 could make the deal viewed as even more unfriendly by key Yahoo employees, a constituency that Microsoft wants to make happy at all costs," the UBS analysts noted.