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Microsoft shares may withstand 10 percent bump in Yahoo bid

Software giant may appease shareholders, should it bump Yahoo bid up 10 percent, analyst report says. Its share price has the double-digit assumption baked in.

Microsoft may find it has some leeway in increasing its Yahoo bid by 10 percent without spooking its investors, one Wall Street analyst notes in a research report Thursday.

Brent Thill, an analyst at Citigroup Global Markets, surmises in his research report that Microsoft's share price already reflects a possible 10 percent increase for its initial stock-cash buyout offer of Yahoo for $31 a share.

"We think Microsoft's stock embeds a potential 10 percent increase in the bid price; anything greater may create additional pressure on the shares," Thill says in the report. "We continue to believe a $34 offer would be a reasonable, valuation-supported base case for Yahoo."

Since Microsoft announced its unsolicited buyout bid on February 1, its share price has fallen 11 percent, while the Nasdaq has dipped only 2 percent.

Microsoft investors, Thill notes, apparently are focused only on the Yahoo transaction and are ignoring strong underlying fundamentals of the Redmond giant, as it gears up to report its fiscal third quarter next Thursday.

Wall Street expects Microsoft to post third-quarter earnings of 44 cents per share on revenue of nearly $14.5 billion, according to Thomson Financial.

But Thill expects the software giant to beat Wall Street's estimates for both earnings and revenues for the quarter. He anticipates that Microsoft will earn 45 cents a share on revenue of $14.6 billion.

Some of the issues driving this bullish assessment include a continuation of a strong product cycle and reduction in piracy--two things that aided its performance in the previous two quarters, as well as seasonally stronger PC shipments and upbeat forecasts from IBM and Intel on worldwide demand.

The latter hardware forecasts are expected to help drive software sales for Microsoft.