Remember that not-exactly-friendly offer from Microsoft for Yahoo?

Mark Mahaney, an analyst with Citigroup, notes today that Yahoo is trading at a discount to Microsoft's offer and at a 23 percent discount to what he calls a potential $34-per-share offer. Raising the bank's recommendation on Yahoo shares to "buy" from "hold," Mahaney said, "We believe that a Yahoo sale to Microsoft—at a price likely higher than the initial $31 bid—is the most likely outcome."

Shares of Yahoo are up more than 3 percent at midday on hopes for a higher bid.

Meanwhile, Yahoo has been searching for a strategic alternative to a Microsoft takeover, but Kara Swisher reports that Yahoo's growth plan has not been well received during a road show for investors put on by C.E.O. Jerry Yang and other top executives. She says, "While the group met with polite audiences, most investors I talked to were unenthusiastic about the plan and dubious that Yahoo's blue-sky hopes would come through. 'I think we wanted to give Jerry a hearing, but mostly to save face,' said one investor, in a sentiment that was typical."

Earlier this month, Yahoo pushed back the deadline for Microsoft to submit a rival slate for its board, but it has yet to schedule a date for its annual meeting.

Henry Blodget, in Silicon Alley Insider, argues that Yahoo needs to get the process started again: "It's time to restore the normal democratic process and let shareholders hear both sides (or, at least, to have the threat of shareholders hearing both sides get the negotiations going)."

Microsoft, for its part, has indicated that it remains very interested in Yahoo. In an interview with the 24/7 Wall St. blog, Steve Ballmer, Microsoft's chief executive, says, "We’ve made the offer, we think it’s a strong offer, and we think it represents very good value to shareholders and customers."