Yahoo shares fight to regain ground after open

This post was updated at 1:45 p.m. PDT with updated information following the market's close:

Yahoo's shares took a hammering early Monday morning. But by the market's close, a badly beaten, but not mortally wounded, Yahoo ended the day down 15 percent at $24.37 a share.

Microsoft closed out the session at $29.08, down 0.55 percent.

This blog was also updated at 9:50 a.m. PDT.:

Yahoo shares fought back some of their losses in late morning trading, reaching $24.70 a share, down 13.85 percent from Friday's close.

At the start of the session, the Internet search pioneer was down nearly 20 percent, and in premarket trading down 22 percent.

Microsoft's gains have been shrinking through the morning, leaving the software giant up 0.24 percent to $29.48 a share in late morning trading.

Since the opening bell, shares of Microsoft, which remain in positive territory, have been edging slowly south, while Yahoo, which plunged into the red following Redmond's withdrawal over the weekend of its unsolicited buyout bid, has been pushing upward. Whether this convergence is a sign investors believe the parties may lock horns again has yet to be seen.

"We believe that Microsoft's decision to walk away is driven by its desire to expose Yahoo management as apathetic to shareholder interests," Heath Terry, a Credit Suisse analyst, said in a report.

Needham analyst Mark May, meanwhile, anticipates Yahoo will make a move to appease its shareholders by announcing a "transformational partnership or transaction," such as a Google ad outsourcing deal.

"However, it remains unclear if this deal alone will enable Yahoo to hit the aggressive (2009 and 2010 financial) projections it recently set forth, and we believe some large Yahoo shareholders are unhappy with the prospect of outsourcing a meaningful portion of the company's strategic business," May stated in his report.

Yahoo kicked off at $23.02 per share as the markets opened Monday--down 19.7 percent from Friday's close. The Internet pioneer regained a bit of ground compared with its premarket price on Monday of $22.41.

On Saturday, Microsoft said the two companies could not overcome differences in opinion over the price of a potential acquisition. Microsoft was offering $33 a share; Yahoo wanted $37 per share. Yahoo's two largest institutional investors were willing to take $34 a share, according to a source familiar with their thinking.

Yahoo, prior to the bid's original announcement, had closed at $19.18 on January 31. Over the course of the three months since then, Yahoo's shares had traded as high as $30.25 and as low as $25.72.

Will it or won't it?
Wall Street has conflicting views on whether Microsoft will return to the negotiating table.

"We see the bid premium diminishing but not disappearing given...precedents for a thwarted bidder returning, such as Oracle/BEA," James Mitchell, a Goldman Sachs analyst, stated in a research note.

But Walter Pritchard, an analyst with Cowen & Co., doesn't believe Microsoft's decision to walk away was a negotiating tactic.

"Microsoft is far enough behind in (its online services business) that it needs to commit to a strategy, and waiting on a Yahoo acquisition simply puts the company further behind," Pritchard stated in a research report.

UBS analysts, meanwhile, believe that Microsoft still needs Yahoo and that a deal is still doable. But any chance for reigniting negotiations, they said, depends on whether Yahoo moves forward with its Google ad-outsourcing deal, as is expected midweek.

Microsoft shares creep up
Microsoft, meanwhile, opened at $29.95 per share on Monday, up 2.4 percent from Friday.

Shares in the software giant have been under pressure since Microsoft announced its buyout bid. Microsoft closed at $32.47 a share on January 31--the day before it announced its unsolicited bid. During the past three months, the stock had traded as high as $32.10 and as low as $26.87.

Microsoft, when it initially announced its buyout bid, had valued Yahoo at $31 a share. Last week, it raised the bid to $33 a share.

Pritchard predicted in his report that Microsoft stock will do well following the weekend's news. "We believe (Microsoft) shares can outperform the market by 10 percent over the next 12 months, although upside beyond this is likely capped due to worries of higher online services business spending coming," Pritchard wrote.

He added that instead of buying Yahoo, Microsoft would be better off acquiring "smaller but more innovative Internet companies" and taking an aggressive approach to signing advertising deals.

Microsoft, which had been relatively quiet on its plan B while its Yahoo quest was still alive, outlined a few of its options in a letter to its employees after the pullout.