Skeptical investors are trading Yahoo Inc shares at a 6.5 percent discount to Microsoft Corp's unofficial offer price, but some Wall Street analysts expect the software giant to raise its bid.

UBS on Tuesday set a price target for Yahoo shares above Microsoft's $31 offer and Citi said a raised Microsoft bid was the most likely of five scenarios it saw for the unfolding drama between the world's largest software company and the ailing Internet star.

Yahoo shares closed on Tuesday at $28.98, more than $2 below the $31 price Microsoft offered last week. Microsoft shares have dropped about 12 percent since that offer was made, potentially cutting the value of the half cash, half stock offer.

But UBS set its price target for Yahoo at $34, saying Microsoft "will do what is needed to get this deal done."

"In a hostile deal the acquirer usually does not lead with its best and final offer and we would not be surprised to see Microsoft sweeten the pot somewhat to make the decision easier for Yahoo's board," the investment bank wrote in a note.

Citi has a $31 target price but said the likeliest outcome, at a 40 percent chance, was for Microsoft to raise its bid and make the acquisition after Yahoo rejected the initial offer.

"It's reasonable to assume that Microsoft might be willing to increase its offer," analyst Mark Mahaney said in a note.

Citi gave a 20 percent probability that Yahoo would accept the current bid and a 25 percent chance that Yahoo would hire Google Inc to run its search operations in a lucrative contract. It saw a 10 percent chance regulators would block a deal and a 5 percent chance another bidder emerged.

Yahoo has said that it would consider the proposal in the context of its strategic plans. It did not have additional comment on Tuesday.

"The board is working very hard and carefully considering its options. It is trying to make the right decision," said one source familiar with the board's actions.

Microsoft wants Yahoo's Internet advertising abilities, Citi said. Deal synergies would leave the acquisition reasonably priced even at a higher bid, it argued. Moreover, Yahoo has a poison pill provision and stands to do more for Microsoft if the deal is friendly - many analysts have remarked that winning over Yahoo's rank and file would be key to the deal's success.

Finally, Citi and UBS both said that software company Oracle Corp's...


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Yahoo chief executive Jerry Yang has sent a message to employees, assuring them the firm's leaders are exploring ways to avoid a takeover by software giant Microsoft.

In an email to Yahoo workers on Wednesday, Yang said the board of directors has yet to decide how to respond to Microsoft's offer to buy the veteran Internet company for USD 44.6 billion in cash and stock.

"Our board is thoughtfully evaluating a wide range of potential strategic alternatives in what is a complex and evolving landscape," Yang wrote in the email, which was filed with the US Securities and Exchange Commission.

"What has become clear in the past few days is how much people care about this company. I have heard from many of you, and from other friends and colleagues from around Silicon Valley and across the globe, that we need to do what is best for Yahoo and our shareholders."

Microsoft's unsolicited offer to pay the equivalent of USD 31 per share for Yahoo highlights the 14-year-old California firm's potential to recapture past glory, Yang told employees.

Microsoft publicly announced what it billed as a "generous" offer for Yahoo on February one and said its plan is to combine resources to take on Internet powerhouse Google.

Google has come out against the proposed takeover, condemning it as an attack on the freedom of the Internet.

Yahoo has received calls from "a number of interested parties" and has a wide range of strategic options, a source close to Yahoo said.

Those options include outsourcing online advertising to arch-rival Google, a proven master at pumping revenues from that well.


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