The question has been asked, if Yahoo can make it without a comprehensive advertisement deal with the larger search provider. Now that Google has scrapped the Yahoo partnership rather than challenge the Justice Department over its antitrust objections to the deal, Yahoo is back where it began the year, scrambling to engineer a turnaround under a management team on shaky ground with shareholders.

Except now, the climate is much worse. The crumbling economy is discouraging advertisers from spending online, particularly on the billboard-style display ads that are Yahoos bread and butter. Sunnyvale, Calif.-based Yahoo, already adjusting, announced it would lay off 10 percent of its work force after profits plunged 64 percent in the most recent quarter.

Yahoo Chief Executive Jerry Yang may have wrung the last drops of shareholder goodwill by betting on a Google deal instead of taking Microsofts offer. To avoid getting pushed out by Yahoos board, which now includes activist investor Carl Icahn, Yang is under intense pressure to boost the companys bottom line.

In an appearance Wednesday night, Yang said Microsoft Corp. would be wise to make another bid for his company, though he didnt suggest a price. Yang turned down Microsofts offer of $33 a share in the spring, and now finds Yahoo trading around $13.

“To this day, I believe the best thing for Microsoft to do is to buy Yahoo,” Yang said Wednesday.

Barring that, his list of options is limited, and the most obvious moves have been on the table for months.

Imran Khan, an analyst for JP Morgan, said he believes it would make sense for Yahoo to sell its search operations to Microsoft – an idea that Microsoft proposed this spring but Yahoo rejected.

The result would be cost savings for Yahoo, and more energy to focus on the display ad business. Khan estimates $1.4 billion in cost savings or, after factoring out $694 million in lost annual revenue, a net gain of $725 million. Yahoo could use the cash to buy back stock, make smart acquisitions and “more strategic, targeted head count reductions,” Khan argues.

“We think continued investment in search, at the expense of display investment, has given competitors the opportunity to bite into Yahoos leading display ad market share,” Khan wrote in a recent research note.

Yahoo shareholders are still interested in some sort of Microsoft deal, and despite Microsofts current stance that it doesnt need Yahoo to challenge Mountain View, Calif.-based Google, many industry watchers think the software maker is still interested, to a point.

Matt Rosoff, an analyst for the independent research group Directions on Microsoft, said he cant see Microsoft buying all of Yahoo, for the same reasons talks fell apart in the first place: Microsoft was hoping for a quick and painless integration, but Yahoo resisted.

“At this point, given how the online ad market has changed and how the overall economy has changed, they might just wait for Yahoos situation to get worse,” the analyst said. Microsoft may also wait to “see what happens to Google and their revenue. Perhaps Google wont look like a threat, and Internet advertising wont quite look like such a good business.”

Rosoff said he could also see Microsoft trading its MSN Web portal for Yahoos search engine, or configuring a similar swap.

Rob Sanderson, an analyst for American Technology Research, noted that giving up its search business to Microsoft would undercut one of the pillars of Yahoos go-it-alone strategy, that having both search and display ads will eventually pay off more than keeping just one.

So for Yahoo to benefit from selling its search engine to Microsoft, the price would have to be a lot sweeter than the $1 billion Microsoft offered last time, Sanderson said.

But Microsoft made that offer knowing Yahoos Google partnership was in the works. Now that the deal is off the table and Yahoos shares are foundering, the software maker has little incentive to raise its bid.

Source: iades