News : Investors eye Yahoo's alternatives to Microsoft

By Michele Gershberg and Anupreeta Das

NEW YORK/SAN FRANCISCO (Reuters) - Yahoo Inc faced growing pressure on Sunday to find an alternative strategy to Microsoft Corp's $47.5 billion takeover offer after the software maker walked away over a disagreement on price.

Yahoo shares could fall by more than 30 percent on Monday over the breakdown of talks, but that drop could be softened if Wall Street believes Yahoo Chief Executive Jerry Yang has another strategy up his sleeve, analysts said.

Yahoo is likely to push for an advertising partnership with Web search leader Google Inc, sources familiar with the matter said. A tie-up with Google, seen as a big winner from the end of Microsoft-Yahoo talks, should help boost Yahoo's operating performance in the near term.

"It's time to get a move on with Google," said Jeffrey Lindsay, analyst with Sanford C. Bernstein. "Let's hope they weren't bluffing."

Yahoo is also still considering a deal with another Internet media and advertising major, such as Time Warner Inc's AOL, people familiar with the discussions said.

But Yang and the company he helped create could face a flood of shareholder lawsuits or other actions if nothing materializes.

"There are two things that could support the stock: the potential for Microsoft to return and the potential to do a Google deal," said Clayton Moran, analyst at Stanford Group.

Moran said Yahoo shares could fall to the mid- to low-$20 range on Monday from their $28.67 close last week. Other analysts said it could slip closer to $19.18, where it closed on January 31, a day before Microsoft made its offer public.

Yahoo is also likely to push for the Google partnership, sources familiar with the matter said. That should boost Yahoo's operating performance in the near term, but runs the risk of regulatory scrutiny over an alliance between the Internet's top two players.

"Yahoo's execution remains the problem, as the company has not been able to execute better targeting and measurement on its own site effectively enough over the past 15 years," UBS analyst Heather Bellini wrote in a note to clients.

Bellini said she would not give Yahoo "the benefit of the doubt that they can make meaningful improvement over the next three years," especially as the break up of talks creates an even more competitive backdrop for Yahoo, Microsoft and Google.

Some of Yahoo's shareholders have already started to make their discontent public.

Bill Miller, a portfolio manager for Legg Mason, Yahoo's second-largest shareholder, told the New York Times on Sunday that he would have considered selling to Microsoft for $34 or $35 a share.

While that was more than Microsoft's offer, it was less than the $37 per share Yahoo's board insisted on.

"There is going to be a lot of pressure on Yahoo's management to deliver in the next year or two," Miller said, according to the New York Times.

Yahoo shares fell 15 percent, or $4.43, to $24.24 after initially falling as low as $22.97. Google shares rose $12.99 to $594.28, while Microsoft shares jumped 57 cents to $29.81 on the Nasdaq.

(Editing by Maureen Bavdek and Derek Caney)