Why Yahoo's Yang Is Holding Out

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For one, say these people, Yahoo seeks some hedge against regulatory hurdles that could delay or even quash the deal. Such issues could take a year or more to work out, analysts say. Indeed, Google (GOOG)'s much smaller $3.2 billion acquisition of ad firm DoubleClick announced in 2007 took nearly a year to get a nod from regulators. And if regulators quash the deal, Yahoo could be left crippled.

Search Operations Only?

Moreover, Yahoo is looking for some certainty that the value of the deal will hold, people say. Given that Microsoft's original bid was half-cash and half-stock, the transaction's value is subject to movements in Microsoft's stock. As Microsoft's share price dropped amid concern over the challenges of integrating so large a target, so did the value of the deal—by several billion dollars.

There's also no guarantee that Microsoft's stock won't fall after the deal closes. After all, analysts note, it took a 12-year campaign to gain a leadership position online, and Microsoft has little to show for its effort beyond an Internet division that continues to lose money—$775 million on sales of $2.4 billion in the last nine months. It wouldn't be beyond the pale for Yang to be reticent about getting swallowed by a company that has performed even more poorly online than Yahoo, which remains profitable despite its other shortcomings. Microsoft's share of search queries, for instance, is 10%, compared with Yahoo's 18%, according to Nielsen Online.

All the reasons for the board to resist a Microsoft takeover notwithstanding, Yahoo investors clearly have little confidence that an independent Yahoo can turn itself around. Yang has been unable to pull off that feat in nearly a year since taking over as CEO. So people close to the situation believe a deal of some kind still remains likely.

Yahoo and Google are discussing an arrangement whereby Google would handle search and related advertising for Yahoo. But after weeks of speculation that it's imminent, nothing has been announced. Microsoft is also discussing a deal that may involve a purchase of Yahoo's search operations only. Those talks appear to be more active. That arrangement may even prove attractive to shareholders, especially hedge fund investors who had been hoping for an acquisition, the quickest way to cash out of what was intended to be a short-term investment.

Google's Unchecked Success

Sandeep Aggarwal, an analyst with financial-services firm Collins Stewart (CLST.L), estimates that if Microsoft paid $15 billion for Yahoo's search operation and $3 billion a year to run ads on Yahoo Web pages, such a deal could add up to $9 a share to Yahoo's stock price—well north of Microsoft's last offer of $33 a share. "Maybe there's more value Yahoo can extract with just a search deal," Aggarwal says.

The big uncertainty after all this time is whether the two sides can find middle ground. One person familiar with Yahoo's thinking says the board, no doubt softened up by Icahn's entry into the fray, is more amenable to a Microsoft deal than it was a month ago. What's more, some people who know Yang and Yahoo's board think the reported resistance to a Microsoft deal is overblown. "There are people in the Valley who have cultural issues with Microsoft," says Ellen Siminoff, an early Yahoo executive who's now chairman of search marketing firm Efficient Frontier. "I don't think Jerry is one of those people. He doesn't have an irrational view or hatred of Microsoft."

Whatever reservations he may have, Yang no longer has the luxury to indulge them, because he faces more than just a voracious Microsoft and angry shareholders. Yahoo and Microsoft face a more formidable rival. "Google's running free, they own the frontier," says Stephen Mader, vice-chairman and managing director of board services for Korn/Ferry International (KFY). "Microsoft and Yahoo both suffer from Google's success." As long as they've held out so far, Yang and his board may not have much more time to decide what to do next.

Hof is BusinessWeek's Silicon Valley bureau chief .