Investors in Yahoo latched onto hopes the company could resume talks with Microsoft, though an executive at the software maker cast doubt Tuesday about any return to a deal.
Shares in Yahoo rose 4.4 percent, partially recovering from a 15 percent slide Monday after Microsoft withdrew its $47.5 billion bid for the Internet company in an effort to create a real competitor to Google.
Yahoo Chief Executive Jerry Yang told Reuters on Monday that he had "mixed feelings" about events over the weekend, when talks broke down, and was still open to talks.
Microsoft had sweetened its offer to $33 per share from an initial $31 per share, but Yang held out for a price closer to $37 per share. (Video: CNBC's David Faber reports that activists may have Yahoo in their sites)
Asked if Yahoo would still leave a door open for Microsoft to return, Yang said: "If they have anything new to say, we would be open....I am more than willing to listen."
Yang also stressed that he has been ready to negotiate and find common ground when Microsoft ended the talks abruptly.
But a Microsoft executive said Tuesday the company had reached the "end of the story" with Yahoo and will focus on its own strategy to be a leader in Internet services.
"We decided to move on and basically withdraw our offer, the president of Microsoft International, Jean-Philippe Courtois, told Reuters in London.
Asked if that was the end of the story with Yahoo, he replied: "Absolutely, that's the end of the story. We are moving on because our strategy is very clear."
Yahoo shares rose $1.10 cents to $25.47 after trading as high as $25.64 earlier in the session. Microsoft rose 1.2 percent to $29.43.
A Softer Stance?
Yang's softer stance came as two of Yahoo's largest shareholders independently told The New York Times they would have been happy with a deal at $34 per share.
"I am extremely angry at Jerry Yang and at the so-called independent board," Gordon Crawford, portfolio manager for Capital Research Global Investors, the largest Yahoo shareholder, with some 16 percent of stock, told the newspaper.
Crawford's sway over media companies is legend. In 2002, he mounted a campaign to force the resignation of AOL Time Warner Chairman Steve Case, the architect behind one of the worse corporate mergers of its era. Case resigned in January 2003.
In an apparent effort to rein in a shareholder revolt, Yahoo said it would hold its annual shareholder meeting on July 3. It set a May 15 deadline for nominating candidates to the board, giving dissident shareholders just over a week to launch a proxy fight.
Yang maintained that even Microsoft's sweetened offer did not value Yahoo properly for its Web search advertising technology, its prominence in selling display ads and its lucrative overseas holdings.
Some analysts said Yahoo shares could have fallen closer to $19.18, its price before Microsoft made its bid public on Feb. 1. But the descent on Monday was cushioned by investors who are betting Microsoft will eventually come back to the table.
"This is going to play out over the next several months and there is still a chance Microsoft will buy the company for somewhere around $33 a share," said Todd Dagres, general partner at venture capital fund Spark Capital.
Microsoft courted Yahoo to capitalize on the rapidly growing market for Internet advertising, one that has long been served by Yahoo's search, e-mail and Web communities.
It is also trying to fend off the expansion of Google, which has made inroads into Microsoft's home turf with a portfolio of Web based-applications, e-mail and messaging.
But now that a deal has fallen apart, Google has emerged as the key beneficiary. Not only has the creation of a larger competitor been averted, Google may also reach a partnership with Yahoo to deliver some of its paid search listings.
Google and Yahoo are hammering out the intricacies of a potential deal and also are sharing their plans with antitrust regulators, a person close to Google, who was not authorized to speak publicly on the matter, said.
A Google deal would 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.
In a letter to Yang over the weekend, Ballmer warned that any deal between Yahoo and Google would be difficult to unravel and would preclude an agreement with Microsoft.
Yang told Reuters the company would take care to structure any new efforts to "preserve as much (as possible) long-term flexibility for Yahoo, both operationally and strategically."