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Might Yahoo! Announce Microsoft Deal During Earnings?

In the short term, probably nothing could give Yahoo stock a bigger jolt than if CEO Carol Bartz forged a partnership with Microsoft. Both her predecessors, Terry Semel and Jerry Yang, flirted with the idea before rebuffing the world's largest software maker.

But many analysts now believe Yahoo and Microsoft could get together in an attempt to pose a more formidable challenge to Google. A deal could be signed as early as this week,according to All Things Digital, a technology blog that cited unnamed people at both companies.

Yahoo declined to comment, but Bartz has publicly said she will join forces with Microsoft if the price is right and she is convinced her company will still have adequate access to search data. That information on Web surfers is important to Yahoo because it wants to track user preferences so it can figure out what kind of advertising is likely to generate revenue-generating clicks in its own marketing network.

If the partnership occurs, analysts believe Yahoo will receive a large lump sum and be guaranteed billions more dollars spread over several years. Yahoo also would reap annual savings estimated at $500 million to $1 billion from not having to run its own search engine.

Outside the deal chatter, expectations for this quarter remain low, particularly after rival Google reported lackluster revenue growth last week. Specifically, Google's ad sales rose just 3 percent in the period, making it seem more likely Yahoo's revenue will decline since it is a smaller player.

However, even if Yahoo's revenue erodes further, the company's profits may hold up slightly better because Bartz has been clamping down on expenses. The cost cutting has included 700 layoffs that trimmed Yahoo's work force by about 5 percent.

Considering Yahoo! is scheduled to report on Tuesday, what’s the trade?

Without a deal, I think the stock is probably setting up for a short-term fall, says Jefferies analyst Youssef Squali. I wouldn’t be surprised to see it sell-off after earnings. But if it dips to the mid-teens, then I’d be a buyer.

For me the trade is to watch Microsoft, says Joe Terranova. If they ink a deal with Yahoo! it suggests they’re very serious about increasing their presence in Internet search.



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