As Deadline Looms for Yahoo, Will Microsoft Increase Its Offer?

Better-than-expected first quarter results from Yahoo! Inc. (YHOO) on strong fees revenue may give the company the leverage to seek a slightly higher bid from Microsoft Corp. (MSFT) as analysts estimates are heading higher. However, its lack of margin expansion in the second half of 2008 may demonstrate a gap in terms of sustainable upside versus the first quarter, according to RBC Capital Markets’ Ross Sandler.

Yahoo raised its full-year EBITDA guidance for 2008 by $50-million, excluding one-time items in the first quarter, which essentially translates to no upside in any subsequent quarters, the analyst told clients.

Nonetheless, he believes the two will eventually come to terms on a merger, given that Yahoo management is not unconditionally opposed to a deal. He continues to rate Yahoo at “outperform” with a $32 price target.

So, while the results were strong, investors failed to drive Yahoo shares higher, which should disappoint those hoping to crush Microsoft’s argument that its $44-billion bid to mount a challenge to Google Inc. (GOOG) in online advertising is fairly valued. However, RBC expects consensus estimates will rise by 3% to 4%, which implies that Yahoo’s overall value could rise by roughly the same amount.

Microsoft has imposed a Saturday deadline for Yahoo to respond to its offer before it launches a proxy battle to replace Yahoo’s board.