The Net giant is calling on Redmond to bump up its bid, but many of its largest shareholders have dual ownership in both stocks.
And, in a number of cases, Microsoft accounts for a larger slice between the two, which could dampen Yahoo's efforts to generate strong investor momentum in calling for a substantially higher price, according to a report released Friday by RiskMetrics Group. In effect, it's like asking these large investors to bid against themselves.
"This is the pressure that Yahoo is under," said Chris Young, RiskMetrics director of M&A research. "If the Yahoo investors owned fewer Microsoft shares than Yahoo, then the pressure would be different."
For example, Yahoo's largest investor, Capital Group's Capital Research Global Investors and Capital World Investors, managed 523.6 million shares of Microsoft, compared with 154.8 million shares of Yahoo, as of December 31.
And T. Rowe Price, which ranks among Yahoo's top-10 investors, owned 136.5 million shares of Microsoft compared with 22.8 million shares of Yahoo, during the same time period.
According to RiskMetrics, 90 percent of all Yahoo institutional investors also own shares in Microsoft. And of this group, 15 of the top 20 Yahoo institutional investors own more Microsoft than Yahoo.
RiskMetrics, which also operates ISS Governance Services, provides proxy advice to 1,900 clients that range from pension funds to hedge funds to mutual funds.
Some investment firms, such as Fidelity, allow each portfolio manager to vote their fund's shares independently, rather than taking a companywide approach, proxy solicitors say. As a result, Fidelity could have one fund that is heavier in Microsoft vote one way on a merger, while another Fidelity fund votes differently.
The long-held theory in mergers and acquisitions is that fund families will vote their shares based on the net benefit they receive as a firm, Young said.
"Investors who own both Yahoo and Microsoft will probably support Yahoo asking for a sweetener (to the deal), but will probably tell Yahoo don't rake Microsoft over the coals," Young said.
Proxy solicitors expressed similar sentiments, noting that in the past two weeks since Microsoft launched its unsolicited bid for $31 a share, Yahoo investors who have duel ownership in the stocks have had time to assess the effect on their respective portfolios.
"The investors are very adept at playing both ends against the middle to extract the best value," said one proxy solicitor. "They're probably telling Yahoo to try to get the best offer you can, but let's not lose the deal."
Matrix Asset Advisors falls into that category. Matrix, which manages $1.6 billion in assets, has been a longtime holder of Microsoft shares and is a recent owner of Yahoo.
Matrix, which acquired Microsoft shares when it was trading in the mid-$20 a share range, cast an eye at Yahoo in January, purchasing 435,000 shares.
And while its Yahoo position falls short of its ownership in Microsoft, Matrix supports Yahoo seeking a higher price.
"Microsoft's current price is essentially fair. It gives Microsoft some wiggle room if they want to pay a little bit more," said David Katz, chief investment adviser for Matrix Asset Advisors. "We don't think Yahoo is worth $40 a share, but does it make sense at $33 to $35? Under the right circumstances, that would do right for all sides."
And while Microsoft's buyout bid has put pressure on its share price since it was announced, Katz said he believes that will be for the short term. He added that the software giant's share price will benefit in the long run with a Yahoo merger.
"We think the Microsoft board is focused on having a dominant franchise in the Internet search and ad space," Katz said. "This is where they have spent a lot of money but have not had a lot of traction. This is their best shot at becoming a meaningful player."
Yahoo and News Corp. are reportedly discussing exchanging some of News Corp.'s assets, such as its popular MySpace.com and other Fox Interactive Media group Web sites, in exchange for a large investment stake in Yahoo, .
Some observers speculate that News Corp. might not be the only media company with an interest in Yahoo.
"I'm sure there are similar (discussions) in the offing with a few of the other big-media companies," a source close to the matter told CNET News.com when asked about the reported News Corp.-Yahoo talks. But the source suggested that they probably won't get in the way. It's "unlikely they amount to much, but there is something there."
As Yahoo and Microsoft evaluate the shareholder base of the Internet company, they will be taking note of who owns stock in both, how those shares are weighted, and how each of those respective investment firms tend to handle voting matters, such as on a fund-by-fund basis or by taking a firmwide approach, proxy solicitors say.
And once that analysis is completed, the tough task begins in assessing whether to raise a bid, launch a tender offer, or kick off a proxy fight for directors' seats, proxy solicitors said.
If they do a proxy fight or tender offer, it could be an eight-month battle, with Yahoo losing a number of employees, as well as a distraction for both companies, proxy solicitors say.
Said one proxy solicitor: "There is a time value of money."
CNET News.com's Caroline McCarthy contributed to this report.