Yahoo shares edged up on Tuesday as analysts and the company's own major shareholder and director, Carl Icahn, said they hoped the the internet search pioneer would entertain a search-only deal with Microsoft.
That recommendation followed reports on Monday that Yahoo and Google have dramatically watered down their initial search-advertising proposal, as a means to gain approval from US antitrust regulators.
Analysts with Sanford C Bernstein and Co said in a research note that Yahoo should dump its Google deal and turn its attention back to Microsoft, which previously had offered as much as $33 (£21) a share for the entire company and later came back with a search-only acquisition offer. Both deals were rejected by Yahoo.
The analysts said: "We think the Google and Yahoo proposal to the Department of Justice, as reported in the press, to limit the deal to 25 percent of Yahoo's paid search revenues and to reduce the term of the deal from 10 years to two years is a desperate gambit that is likely to fail."
"We expect the Department of Justice to defer a decision to next year and believe they are preparing for an antitrust showdown with Google. We expect the Google-Yahoo deal to founder, leaving Yahoo unable to acquire AOL's portal and stuck in a standalone value-trap," said the analysts.
"Under these circumstances, we think that Microsoft might come back in the new year with a reduced bid in the region of $20 per share," the analysts added.
The analysts are not alone in their hope for a Microsoft comeback.
Yahoo shareholder and director Carl Icahn, appearing on Monday on CNBC, reiterated his hope of a Microsoft-Yahoo deal: "I have said publicly and will continue to say it... I believe, as a large shareholder... that eventually Yahoo should, if it's available, make a deal with Microsoft to sell the search business."
While Icahn said he doubts Microsoft is interested in buying all of Yahoo, he noted that Yahoo could "save a fortune" if Microsoft operated its search business.
While the software giant has yet to make any public moves in that direction, chief executive Steve Ballmer is still keeping an eye on the company. Last month, Ballmer said, during a Gartner keynote presentation, that an acquisition of the company "still made sense" for Yahoo and Microsoft shareholders.
That comment sent Yahoo's share price up before Microsoft issued a statement that there were no talks going on between the companies and that the software giant had no interest in acquiring Yahoo.
Shares in Yahoo were up 4.7 percent to $13.35 a share in late afternoon trading on Tuesday.
