MicroYahoogle: Is Wall Street's 'Misery' Over?

Sam Gustin says: So it's over. Or is it?

Despite the seeming finality of Yahoo's decision to slam the door on Microsoft and run into the arms of its erstwhile arch-rival Google, some on Wall Street don't believe this saga is necessarily over. In fact, two prominent analysts still believe Microsoft could revive its hostile bid.

"A deal is less likely than it was a few weeks ago, but not impossible," Cowen & Co. analyst Jim Friedland wrote in a note to clients Friday. "Microsoft holds most of the cards and could hold out for a lower price. After all, its bid has dropped from $40 to $35 to $33 (via $31) over the past year."

UBS analyst Ben Schacter agreed, but sounded less than thrilled by the prospect that the Steve and Jerry and Eric and Carl show could go on.

"Unfortunately, for all of us that are beyond tired of the constant news flow and speculation around a possible Microsoft/Yahoo deal, this Google/Yahoo agreement will not put us out of our misery as we still think Microsoft needs Yahoo," Schacter wrote today.

Yahoo is already facing a proxy onslaught from financier Carl Icahn, as well a several shareholder lawsuits claiming it breached its fiduciary duty to shareholders by not accepting Microsoft's $33 per share offer -- and it will surely face more, according to Sanford C. Bernstein analyst Jeffrey Lindsay.

Schachter suggested that Yahoo's decision to partner with Google "may push MSFT into a corner where it will have no choice but to finally follow through with a hostile bid."

One phone call from Steve Ballmer to Carl Icahn, and this thing is on again. It's hard to imagine that Microsoft is not seriously considering this option, though its decision whether to restart its hostile bid is a function of its desperation. As I noted earlier this week, the internet search wars are effectively over, but Microsoft appears to be in denial of that fact, given that the company was willing as to buy Yahoo's search business outright for about $7 billion earlier this week, an offer Yahoo rebuffed.

And then there are the regulatory hurdles facing the proposed Yahoo/Google search advertising partnership.

"While the agreement is clearly structured to emphasize its non-exclusivity and open marketplace, Google will certainly be the only meaningful provider," Schachter wrote. "Additionally, no matter how you look at this deal, it raises pricing for advertisers, a potential red flag for regulators. Somehow, we doubt that Microsoft will be shy about raising such issues to the regulators."

Already, Sen. Herb Kohl, a Wisconsin Democrat who chairs the antitrust subcommittee, has vowed to "closely examine" the deal. "The consequences for advertisers and consumers could be far-reaching and warrant careful review, and we plan to investigate the competitive and privacy implications of this deal further in the Antitrust Subcommittee," Kohl said in a statement.

Over? Not by a long shot.