By Yi-Wyn Yen
Shares of Yahoo (YHOO) rose 3% to $28.35 on Tuesday afternoon after Citigroup analyst Mark Mahaney raised Yahoo’s stock from “hold” to “buy.”
Mahaney, who has consistently said that a merger is likely, suggests that Microsoft raise its offer from $31 to $34 a share. “We believe buying Yahoo shares here provides an attractive return,” he wrote. “We think the strategic value of Yahoo and Microsoft is very significant.”
Mahaney says it’s unlikely Microsoft (MSFT) will walk away from the deal because it has no real alternative to compete with Google (GOOG). “Despite 3-4 years of making online advertising a key strategic priority, Microsoft has yet to demonstrate traction,” Mahaney wrote in a note to clients Monday. He argues that Microsoft will get further left behind as Google continues to increase its lead in search and ramp up its display advertising business with its DoubleClick acquisition.
Mahaney believes Yahoo’s continued efforts to find a white knight will also force Microsoft to up its offer. He believes that Time Warner (TWX), which owns AOL (and Fortune and CNNMoney.com), could form a partnership to swap content in exchange for a stake in Yahoo. However, industry watchers have said that as the weeks drag on with no announcement, it is unlikely that a white knight will swoop in to save Yahoo.