Unable to execute or even articulate how Yahoo! Inc. might reverse its fortunes since he took over as CEO last June, Jerry Yang has been boxed in by Microsoft Corp.'s $44.6 billion bid for the company he co-founded in 1995, and may have little choice but to accept the offer.

"A $31 [per share] offer would have been a joke a few months ago, but because Jerry Yang dropped the ball, now they have to consider it," said Ashkan Karbasfrooshan, a Yahoo! shareholder who blogs about technology companies at WatchMojo.com.

While the $31 offer price represents a sizable 62% premium to Yahoo!'s $19.18 closing price on Thursday, shares of the Sunnyvale, Calif.-based company traded at that level as recently as Nov. 6. The offer price also is substantially lower than the $50 billion proposal Microsoft reportedly made for Yahoo! last year.

Though Yahoo! has been reluctant to strike a deal with Microsoft in the past and might not believe the offer fairly values the company, it may have few other options.

"I imagine in the board rooms of News Corp., Comcast, maybe even GE and others, they're discussing whether they want to get involved here," Jordan Rohan, analyst with RBC Capital Markets, said in a call with the company's institutional clients Friday morning. "But when they realize they're bidding against Microsoft, the conversation is very brief."

Private equity firms also might get involved, but Karbasfrooshan said Yang may be reluctant to sell to someone who could make even more severe layoffs than Microsoft would.

Yahoo! could continue to shut out Microsoft by trying something drastic to thwart a deal, such as outsourcing its search business to rival Google Inc., or spinning off the stakes in its Japan and China operations. Industry observers have suggested these options in the past, but with the offer on the table from Microsoft, it may be too late for organizational changes.

"I don't think shareholders are going to be placated by outsourcing search to Google," said David Garrity, an analyst with Dinosaur Securities. "I think shareholders want to see an all or none transaction. It's not that Yahoo!'s board won't try to explore alternatives, but the preponderance of support in the shareholder base is for realizing value from the company now."

That said, Yahoo! may still be in a position to get Microsoft to bump up its offer.

Clay Moran, analyst with Stanford Equity Research, wrote in a research note that if the anticipated $1 billion in synergies are factored in, Microsoft could afford to pay $35 and still secure a deal that would be accretive to its non-GAAP earnings per share.

Oppenheimer & Co. analyst Sandeep Aggarwal took it a step further. In a research note, he predicted Microsoft "will have to offer $36 to $40 a share," based on synergies from a transaction, noting that Yahoo! reportedly turned down a $40-plus offer last year.

When Yahoo! rejected previous overtures from Redmond, Wash.-based Microsoft, the company was being run by Terry Semel, who was said to be opposed to making a deal. While Yang replaced Semel as Yahoo! CEO last June, Semel stayed on as chairman, but relinquished that position Jan. 31, eliminating another potential obstacle to a deal getting done. He was replaced by Roy Bostock, a member of the company's board of directors since 2003.

The fact that the deal will undergo a lengthy and thorough regulatory review could also work in Yahoo!'s favor.
Fred Boucher, also an analyst with RBC, said Microsoft will need Yahoo!'s help when it meets with regulators. This could open the door for Yahoo! to negotiate a "small bump" from the current offer price in return for its cooperation, he said.

"Microsoft is going to want to go in front of regulators with Yahoo! on their side," he said. "I think it would be much harder to get past this without Yahoo! helping them."

If the acquisition closes, it will have a wide-ranging impact on competitors and other Internet companies that could get swept up in a continued consolidation in the sector.

While the acquisition obviously is aimed at Google, it's unclear whether even a combined Microsoft-Yahoo! would be able to wrest more of the search market from the Mountain View, Calif., juggernaut.

"On first blush it appears an increasing competitive threat for Google; however, so far Microsoft and Yahoo! have been unable to dent Google's growing market share in search and online advertising," Aggarwal writes. "We believe that in the long run, both Microsoft and Yahoo! as a combined company might emerge as a stronger competitor for Google, but lots of developments would have to take place before that happens.

"For right now Microsoft's move endorses the strength in Google's business model and highlights how huge are the online advertising opportunities, which is positive for Google," he added.

If Google does feel a need to respond, it could turn to another Internet bellwether, AOL. In 2005, Google invested $1 billion in AOL for a 5% stake in the company. However, it's unlikely Google will want to spend another $19 billion to take the rest of the company from parent Time Warner Inc. of New York.

Other companies expected to become potential targets in the Internet sector are Westlake Village, Calif.-based ValueClick Inc., the largest independent online advertising company, and Web analytics and business optimization company Omniture Inc. Orem, Utah-based Omniture last October swallowed up Visual Sciences Inc. for $394 million.

Shares of Yahoo! were trading at $28.38 late in Friday's session, an 8.5% discount to the offer price, suggesting investors realize that there is a risk to the deal being completed.