Yahoo Trading Down; Still Wondering If Earnings Will Force A Higher Bid?

Just forget about what Ballmer is saying on Microsoft (NSDQ: MSFT) not raising its bid for Yahoo (NSDQ: YHOO). The market is telling you everything you need to know. Despite a modest “beat and raise”, the initial Microsoft offer still looks more like a ceiling than a floor. If there were anything in the report that warranted a higher offer, Yahoo shares wouldn’t be trading down over 1 percent. This doesn’t mean a raised bid is impossible. If Microsoft decides that it’s better to just end things than to have them drag out, it may swallow its pride and cough up a few more bucks, but last night’s report won’t figure in to that decision. By and large, that’s how analysts feel. The results give Yahoo some credibility at the bargaining table — it’s not a total basket case — but not so much that Microsoft is back on the defensive:

Jeff Lindsay, Bernstein: ” As it is, we think Yahoo! has done enough to hold on a little longer but has fallen short of being able to convince shareholders to reject Microsoft’s overtures. Unless Yahoo! has a real alternative in the form of a deal with Google (NSDQ: GOOG) or AOL (NYSE: TWX) or both, then we think it is only a matter of weeks before Microsoft prevails.”

Ross Sandler, RBC: “The Q1 beat may be enough to give YHOO some leverage to seek a (slightly) raised bid, as estimates are heading higher. However, the lack of margin expansion in 2H08 may signal investment push-out vs. sustainable upside from 1Q.”

Ben Schachter, UBS: Maintaining his view that Microsoft will up its bid just to get the deal done: “Given YHOO