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This said, we do think the events of the last week have modestly increased the likelihood that the takeout price will increase. The merge-with-AOL threat isn't particularly potent as an alternative--although Yahoo or Microsoft should certainly buy AOL--but the Google search deal could deliver immediate, permanent economic value to Yahoo. This should make it easier to persuade Microsoft to pay a bit more, in part because Microsoft will then be able to fire Google and use its own search technology.

Unfortunately, there is still at least some risk that this melodrama will end by Microsoft walking--in which case Yahoo's stock will drop to $20. Every time something happens that makes a Microsoft takeover less likely--a merger with AOL, for example--Microsoft's stock goes up. Why? Because, on balance, Microsoft shareholders don't like this deal, or at least don't like how much Microsoft is paying for Yahoo. So if Yahoo really digs in here, and Microsoft's only choice is to try to get Yahoo's board fired at the shareholder meeting, it is still conceivable that Microsoft will give up and go home.

Which is why we're skeptical of the recommendation of some analysts that YHOO is a screaming "event buy" here. The stock is trading only slightly below the value of Microsoft's current bid, and if Microsoft were to suddenly increase its bid to, say, $33, the stock would likely jump 15% or more. But if Microsoft walked, it would drop by 40%. Doesn't sound like a great risk/reward.

See Also:
Behavior Suggests Yahoo Q1 Strong--So What Happens Next
Yahoos Hate AOL Deal, But Too Scared To Tell Jerry

Photo: Kara Swisher, All Things D