This week should see plenty of action in the Microsoft Corp. [MSFT]-Yahoo Inc. [YHOO] takeover saga. Yahoo! on Tuesday will release its first-quarter earnings report after the market closes, which could affect whether Microsoft sweetens its the $31 a share, $43 billion cash-and-stock offer. On Wednesday, Yahoo!'s two-week trial outsourcing its search advertising to Google Inc. [GOOG] will come to an end, with talk coming from Yahoo! that it could make the relationship a more permanent one. Finally, Microsoft's three-week deadline for Yahoo! to reach an amicable agreement on a deal ends on Saturday, which could spur a proxy fight by the software giant.

Yahoo! is highly likely that to meet or exceed Wall Street estimates for its first-quarter results. If it fails, the company loses its best bargaining chip to draw a higher offer price from Microsoft. In a new research report, RBC analyst Ross Sandler lists a number of key metrics to focus on in the report, beginning with revenues. Consensus calls for Yahoo! revenues to come in at $1.325 billion, the mid-point of its own guidance of $1.28 billion and $1.38 billion, with EBITDA of $424 million. Just as important is whether Yahoo! increases revenue guidance for 2008 from the $5.35 billion to $5.95 billion it forecast in January. Sandler says Yahoo! likely would have engaged in "aggressive negotiations" with Microsoft if it were at risk of missing first-quarter numbers.

"If Yahoo can show upside in 1Q, which we believe to be the case, we think an all-cash deal in the mid-$30s could be a likely outcome," he writes.

Sanford Bernstein analyst Jeffrey Lindsay also believes Yahoo!'s management "pulled out all the stops" to boost its first-quarter numbers. But he also believes that Yahoo! will announce deals with either AOL LLC or Google, or both, ahead of Microsoft's April 26 deadline. Yahoo! has previously discussed a merger with Time-Warner Inc.'s [TWX] AOL property as an option to the Microsoft deal.

"Any new deal of this sort, we believe, will increase pressure on Microsoft to improve its bid price and will reduce its options to threaten to reduce its offer," Lindsay says. "Ultimately, however, we still see Microsoft prevailing in its effort to acquire Yahoo!, but expect their management to find the endeavor more difficult than anticipated when they made the original unsolicited bid at the beginning of February." -- David Shabelman

See April 18 story from Tech Confidential
See April 20 post from Silicon Alley Insider
See April 21 post from BoomTown