Yahoo Shares

Yahoo stock closed down 91 cents, or 6.9 percent, to $12.22. The stock has ranged between $8.94 and $30.25 over the past year.

American Technology Research analyst Rob Sanderson wrote in a note to investors that he expects a significant slowdown in online shopping.

Sanderson also wrote that he expects "the online advertising market to take a much greater than seasonal decline" in the first three months of 2009. The post-holiday first quarter is traditionally slower for online ad spending.

However, Sanderson noted that the possibility of a sale to Microsoft Corp. or another sort of deal could keep Yahoo's stock from falling too far.

"We continue to believe this is the ultimate outcome and will reward Yahoo shareholders, but have no visibility on timing," Sanderson wrote.

The analyst downgraded shares of Sunnyvale, Calif.-based Yahoo to "Neutral" from "Buy" and cut his price target to $14.50 from $18.

Stocks Head to Higher Open

Stocks were poised to open higher Monday after several reports of potential corporate deals, including speculation Washington Mutual Inc. will get a $5 billion investment from private equity firms.

The nation's largest thrift is in talks with buyout shop TPG Inc. about a possible capital injection, according to The Wall Street Journal. The company, which has suffered big losses tied to subprime mortgages, would become the latest U.S. financial institution to reach such a deal.

In addition, Microsoft Corp. gave Yahoo Inc. a three week deadline to agree to a takeover, or Microsoft would launch a proxy fight for control of the company. Yahoo said Monday the deal isn't in the best interests of its shareholders, and called the proxy threat counterproductive.

And Swiss pharmaceutical maker Novartis AG said it will spend about $38 billion in a two-step bid for a majority stake in U.S. eye-care company Alcon Inc.

Earnings season unofficially begins after the closing bell when Alcoa Inc., the world's third-largest aluminum producer, is scheduled to release first-quarter results.

Dow Jones industrial average futures rose 69, or 0.70 percent, to 12,679. Standard & Poor's 500 index futures advanced 11.90, or 0.87 percent, to 1,383.80. Nasdaq 100 index futures rose 15.75, or 0.84 percent, to 1,885.50.

Bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.52 percent from 3.47 percent late Wednesday.

Light, sweet crude rose $1.16 to $107.39 in premarket electronic trading on the New York Mercantile Exchange. Gold was higher, and the dollar was mixed against other major currencies.

There were no major economic reports scheduled to be released during the session.

Overseas, Japan's Nikkei stock average rose 1.18 percent. Britain's FTSE 100 added 0.95 percent, Germany's DAX index rose 0.32 percent, and France's CAC-40 added 1.13 percent.

Yahoo research centre in Israel

Web search company Yahoo Inc.said on Tuesday it has launched a new research lab in Israel, its first in the region.

The research lab in the northern port city of Haifa will be led by Ronny Lempel, an information organisation and retrieval expert. He previously worked at the Information Retrieval Group at IBM's Haifa Research Lab, focusing on research and development for enterprise search systems.

The lab, which opened on Tuesday, will focus on simplifying complex technology problems in searching the Web, Yahoo said.

Rival Google opened its second R&D centre in Israel in June. Its Israeli centres are in Tel Aviv, Israel's financial and cultural centre, and Haifa.

"Search is still in its infancy," Prabhakar Raghavan, head of Yahoo Research, said in a statement. "At Yahoo, we are working on the hard core science that can lead to search experiences that are significantly beyond the current art." (Reporting by Tova Cohen, editing by Elizabeth Fullerton)

Not 'going to get into a fight' with Microsoft

News Corp. (NWS.A:17.79, -0.37, -2.0%) (NWS) Chairman Rupert Murdoch reiterated Monday that the company has no interest in getting into a bidding war with Microsoft (MSFT) over Yahoo (YHOO) . "Yahoo missed out," Murdoch said of the search engine and portal, having acquired Overture several years ago, only to underspend on it and watch Google (GOOG) overtake Yahoo with a more than 60% share of the search engine market share in the U.S. "We're very happy to be in the Google camp," Murdoch went on. "They sell out search advertising, and they pay us well for it." News Corp. is the parent company of Dow Jones, which includes MarketWatch.

Microsoft-Yahoo Deal Likely To Go Through

Yahoo Inc.'s (YHOO) stock was coasting just below Microsoft Corp.'s (MSFT) $31-a-share offer price Tuesday morning as more analysts said they believe the marriage will likely be consummated - even as they cautioned investors to be ready for surprises.

Yahoo has yet to respond to Microsoft's $44.6 billion bear-hug bid to acquire the Internet giant, a move which has prompted rival Google Inc. (GOOG) to publicly voice its opposition to the proposed merger.

On Tuesday, Yahoo was downgraded from buy to neutral by Banc of America Securities. It was the third such downgrade since Microsoft announced its offer on Friday, following similar moves by Susquehanna Financial Group and Soleil Securities Group.

The downgrades came after Yahoo's stock zoomed up more than 50% following the bid - which put the stock in range of several analysts' price targets.

In their reports, many analysts predict that the deal will likely happen and that, for now, investors would be wise to stick close to Microsoft's offer price, which they describe as generous.

"Given the significant premium above the Jan. 31, 2008, stock price, we believe shareholders would be apt to take advantage of this offer," analyst Brian Pitz of Banc of America Securities wrote in a note to clients.

Crawford Del Prete of International Data Corp. said he thinks the deal will eventually happen.

"But I think, given that it's hostile, it will take some time for Yahoo to sort through its options," he said in an email. "However, in the end I expect that they will conclude that this is the best option for shareholders, given the price that was offered and the absence of other suitors."
Still, there could be surprises.

Pitz pointed to reported negotiations between Yahoo and Google on a possible deal to outsource Yahoo's search ads to its rival as a way of blocking the Microsoft bid.

Microsoft's bid could also go higher and, contrary to the view of some observers, another potential buyer could emerge, he said.

"While it's difficult to raise debt in the current market environment, we believe a rival bid from a private-equity consortium is also possible," Pitz said.

Analyst Mark Mahaney of Citigroup, who raised his target price for Yahoo to $31 a share from $22, cited the two scenarios in a research note, but didn't give them as much as weight as other potential outcomes.

He said the $45 billion price tag and "the strategic value of Yahoo to Microsoft make the likelihood of a successful competing bidder very low."

An outsourcing deal with Google would be more likely and could be a viable strategy that could appease Yahoo's shareholders, he said.

But Mahaney gave more credence to another possibility: That Yahoo will reject Microsoft's offer, prompting the Redmond, Wash.-giant to bid higher, with the two giants eventually coming to an agreement.

"The deal makes significant strategic sense for Microsoft," he said. "Our review of bid histories in the software space makes us think this is the most likely outcome."

Mahaney cited another software giant, Oracle Corp. (ORCL), which has been on a buying spree over the past several years. In two prominent unsolicited bids - for PeopleSoft Corp. and, more recently, BEA Systems Inc. (BEAS) - the company ended up raising its offer price.

Many analysts still believe the proposed merger between Microsoft and Yahoo would meet stiff regulatory challenges in the U.S. and Europe.

But given Google's dominant position in online advertising, some of them believe Microsoft would clear this hurdle.

"We estimate that Microsoft and Yahoo today account for, at most, 30% of total U.S. online advertising, with their combined market share less in Europe," Mahaney said. "Thus, while we would expect substantial regulatory review, we assign this outcome only a 10% probability

Microsoft vs.Google

EVEN AS GOOGLE (GOOG: 506.80, +11.37, +2.29%) publicly lambastes Microsoft's (MSFT: 29.07, -1.12, -3.70%) proposed acquisition of Yahoo (YHOO: 28.98, -0.35, -1.19%), the search leader's stock is cratering, closing below $500 for the first time since August. But given the arduous challenge of making any giant acquisition work, especially one as fraught with potential delays and pitfalls as this one, Google's managers may be secretly licking their chops. Assuming the deal gets done — and that's a big if — Google's two largest competitors will be hindered by years of complicated integration. If anyone should be up in arms, it's probably shareholders in Microsoft.

"Google has to put up a stink just because that's their role in this situation," says Roger Kay, president of Endpoint Technologies Associates, a market intelligence firm. "But if I were in the boardroom at Google I would say something like, 'Let's act really upset about this deal but then let it slip through our fingers and have it go through.'"

Kay points out that the average for large integrations is two years, and this one is more complicated than most. Yahoo is based in Silicon Valley; Microsoft (already hardly beloved by the Yahoos) sits up in Redmond, Wash. The cultures are different. The engineering and marketing teams need to be sorted and assimilated. Yahoo operates on a lot of open source software. Microsoft, of course, runs on Windows. Just making the back ends of the two operations work together will be a tough technical challenge in and of itself.

"This is going to take project management on a scale that the Microsoft guys have never done before, and that is a formidable obstacle," Kay says. "And even if they're successful it's going to take a lot of energy and they will be somewhat distracted. That could give Google an opening."
Citigroup analyst Mark Mahaney pointed to that Friday after the proposed merger was announced. "This deal would be a material negative for Google if it were to change user behavior, which would then lead to a shift in ad spending," the analyst wrote. "But we don't think a Microsoft/Yahoo! combination would change user behavior at all. And we could see a scenario by which Google would actually gain more market share due to industry uncertainty over the integration of the deal."

Then there's the unknown of when this shotgun marriage will be consummated. Canaccord Adams analyst Peter Misek wrote Monday that if the deal gets done, competitive gains vs. Google aren't likely to start to emerge until 2009 at the earliest. Throw in the probability of antitrust reviews here and in Europe, and a closing could be pushed out even further. Bank of America Securities downgraded Yahoo to Neutral (Hold, essentially) from Buy Tuesday, saying that "the acquisition could face significant regulatory hurdles in the U.S. and particularly in the E.U., which could delay the acquisition from closing for quite some time."

Microsoft's big problem is that it needs to convert its piles of cash into capital for sustainable businesses that are going to make huge bucks a decade from now. But it's hard to see how throwing billions of dollars at Yahoo serves that end. Microsoft is a sprawling company with five businesses, and all of them are subservient to the company's lifeblood: Windows and Office. The online division isn't just an also-ran to Google and Yahoo; it's the only part of the company that loses money.

Meanwhile, Yahoo's been flailing about for years, losing share to Google and missing out on Web 2.0 innovations like social networking. True, it's the world's biggest destination on the Internet, but still...it's a portal. How 1990s. How quaint. No company is better than Microsoft at spinning a strategic vision, even if the quality of its software and hardware products too often falls short of its rhetoric. But to hear Chief Executive Steve Ballmer extol the opportunities and virtues of the deal, it's clear he's been drinking his own Kool-Aid.

Wall St. awaits another rally

This week, Wall Street hopes economic, earnings data keeps rally going

The stock market has been on the upswing, but few investors are relaxing just yet. This week's data on housing, retailers and labor costs will give Wall Street an idea of whether the economy is weakening or inflation is accelerating - or both.

Wall Street had a case of the winter blues in January, and understandably. With banks reporting huge losses, uncertainty brewing about whether the economy is in recession, and Americans struggling to keep up with their debt payments, there was nowhere to go but down. The Standard & Poor's 500 index recorded its worst January since 1990.

But the stock market has bounced back - last week, the Dow Jones industrial average jumped 4.39 percent, the Standard & Poor's 500 index added 3.75 percent, and the Nasdaq composite index rose 4.87 percent.

The Dow remains 10 percent below the record close of 14,164.53 it reached on Oct. 9, but has recovered nearly 10 percent from the 15-month lows it hit in January.

There were many factors that helped buoy the market last week. The Federal Reserve met the market's hopes for another big rate cut by slashing key rates a half-point. Banks and regulators indicated they are working to help out the distressed companies that insure mortgage-backed bonds. And Microsoft Corp.'s (MSFT, Fortune 500) bid for the struggling Internet provider Yahoo Inc. (YHOO, Fortune 500) reassured Wall Street that although the credit markets are tight, deals are being pitched.

Recent government reports have not painted a rosy picture of the economy, but they haven't indicated the nation is in the midst of a deep recession, either.

The Labor Department's employment report last week showed a net job loss in January for the first time in four years, but a report from the Institute for Supply Management said the manufacturing sector expanded. The Commerce Department said personal spending is growing at the weakest pace in more than a year, but it also reported a solid gain in orders of big-ticket, durable goods.

The markets are angling for more rate cuts to stoke the economy, but what could tie the Fed's hands is inflation. High food, energy and healthcare costs are a reason consumers - particularly homeowners with tough-to-pay mortgages - are cutting back on discretionary spending. Those high prices may also be the only reason readings on personal spending are in positive territory.

The Commerce Department's index last week for personal consumption expenditures, a gauge of inflation, rose 0.2 percent in December from November levels. This week, the Labor Department reports on productivity and labor costs; the market is expecting labor costs to decline, and could be disappointed if they end up being higher.

"The worst of all possible worlds is stagflation," said Janna Sampson, director of portfolio management at Oakbrook Investments. Stagflation happens when the economy weakens at the same time prices are rising. It's a problem that can't be solved with rate moves; rate cuts spur inflation but boost growth, while hikes control inflation but also dampen growth.

This week, economists surveyed by Thomson/IFR are preparing for more signs that the economy is still growing, but very slowly because of a weak consumer.

They expect the Commerce Department's December factory orders index on Monday to tick up and the Institute for Supply Management's Tuesday report on January service sector growth to show a slight slowdown. They also expect the weekly ICSC-UBS chain store sales index on Tuesday to post a decline.

Meanwhile, the National Association of Realtors will release on Thursday its index on pending sales of existing homes, and economists predict a modest increase. And that same day, retailers are releasing their sales results for January.

Investors will also be paying close attention to speeches from Fed officials for insight into their thoughts on the economy and inflation, and whether the central bank is leaning toward lowering rates again when it meets March 18. Atlanta Fed President Dennis Lockhart, Richmond Fed President Jeffrey Lacker, Fed Governor Randall Kroszner, Philadelphia Fed President Charles Plosser and San Francisco Fed President Janet Yellen are all making public appearances this week.

The bulk of the earnings season is over, but there are some big names left to release their quarterly results. Companies reporting this week include media names such as News Corp. (NWS, Fortune 500), Walt Disney (DIS, Fortune 500) and Time Warner Inc. (TWX, Fortune 500); food sellers like Wendy's International Inc. (WEN) and Yum Brands Inc. (YUM, Fortune 500); and the homebuilder D.R. Horton (DHI, Fortune 500).

STOCKS TO WATCH

Yum Brands Inc. (YUM:35.24, +1.08, +3.2%) is expected to report fourth-quarter earnings of 42 cents a share, according to analysts polled by Thomson Financial.

News Corp. (NWS:20.01, +0.62, +3.2%) is forecast to post earnings of 27 cents a share in the fiscal second quarter.

Humana Inc. (HUM:81.84, +2.32, +2.9%) is likely to report earnings of $1.32 a share in the fourth quarter.

Clorox Co. (CLX:63.09, +1.75, +2.9%) is estimated to report fiscal second-quarter earnings of 54 cents a share.

Equifax Inc. (EFX:37.00, -0.09, -0.2%) is likely to post earnings of 57 cents a share in the fourth quarter.

Manitowoc Co. (MTW:39.17, +1.14, +3.0%) is forecast to post earnings of 68 cents a share in the fourth quarter.

Computer Sciences Corp. (CSC:42.14, -0.18, -0.4%) is forecast to report earnings of $1 a share in the fiscal third quarter.

Post Properties Inc. (PPS:42.62, +0.35, +0.8%) is expected to post earnings of 9 cents a share in the fourth quarter.

BE Aerospace Inc. (BEAV:41.84, +3.23, +8.4%) is projected to report fourth-quarter earnings of 44 cents a share.

Anadarko Petroleum Corp. (APC:60.04, +1.56, +2.7%) is estimated to post earnings of 77 cents a share in the fourth quarter.

Wendy's International Inc. (WEN:25.18, +0.78, +3.2%) is expected to report earnings of 23 cents a share in the fourth quarter.

Principal Financial Group (PFG:61.21, +1.60, +2.7%) is likely to report earnings of $1.01 a share in the fourth quarter.

Lincoln National Corp. (LNC:56.09, +1.90, +3.5%) is likely to post earnings of $1.36 a share in the fourth quarter.

PartnerRe Ltd. (PRE:79.48, +0.20, +0.3%) is estimated to post fourth-quarter earnings of $3.19 a share.

Savvis Inc. (SVVS:22.62, +2.42, +12.0%) is forecast to post earnings of 2 cents a share in the fourth quarter.

After Friday's closing bell, The Wall Street Journal reported on its Web site that the House Judiciary Committee will convene a hearing on Feb. 8 to examine Microsoft Corp.'s (MSFT:30.45, -2.15, -6.6%) proposed takeover of Yahoo Inc. (YHOO:28.38, +9.20, +48.0%) . The hearing will consider what the impact on competition of a potential tie-up between the two Internet giants would be, the newspaper said.

Watch list

Concerned by reports of Chinese military hacking into Pentagon computers, four House lawmakers are asking the Treasury Department for information related to its review of the acquisition of 3Com Corp. (COMS:4.05, -0.08, -1.9%) by a Chinese company and its U.S. partner. In September, 3Com said it agreed to sell itself for $2.2 billion to Huawei Technologies Co., the largest networking company in China, and Bain Capital Partners LLC. The lawmakers want to know "the extent and nature" of Huawei's ties to the Chinese People's Liberation Army and if such ties constitute a threat to U.S. national security.

CSK Auto Corp. (CAO:8.98, +3.03, +50.9%) confirmed that it has received an unsolicited proposal from O'Reilly Automotive Inc. to acquire all of the outstanding shares of CSK Auto but O'Reilly Automotive Inc. (ORLY:30.62, +1.19, +4.0%) has declined to sign a confidentiality agreement which precludes access to non-public information. CSK Auto said it plans to proceed with the process to enhance shareholder value as planned.

Dollar Thrifty Automotive Group Inc. (DTG:26.02, +1.64, +6.7%) lowered its adjusted earnings-per-share estimate for 2007 to a range of 90 cents to 95 cents from $1.75 to $1.85 previously. In GAAP terms, it expects earnings to be flat or post a loss of 5 cents a share. The car rental company cited weaker industry demand in the travel market, excess fleet capacity in the industry, and a weakening used car market for its more bearish outlook. The company also said it is suspending its share buyback program.

Liz Claiborne Inc. (LIZ:22.71, +0.82, +3.8%) has finished the strategic review of 13 of the 16 brands it placed under review and plans to conclude evaluation of the other three brands, Ellen Tracy, Kensie, and Mac & Jac, by the end of the first quarter, the company said Friday. It also said it will sell most of the assets and liabilities of Prana to Prana Living LLC, a company formed by Prana's management team and Steelpoint Capital Partners for $36.5 million in cash. The company will pay out $18.4 million to Prana founders in connection with the purchase of Prana in 2005 and record the amount as a charge in first quarter earnings.

Motorola Inc. (MOT: 12.69, +1.19, +10.4%) confirmed it received a notice from Carl Icahn to nominate four directors to the company's board. The notice, Motorola said, indicated that Icahn affiliates beneficially hold about 5% of Motorola's outstanding shares, or about 114.3 million shares. Separately, The Wall Street Journal said the company's CEO Greg Brown is assuming direct oversight of the company's handset unit after pushing aside division head Stu Reed.

Walt Disney Co. (DIS:30.66, +0.82, +2.8%) said it signed new five-year contracts for both its Chief Executive Robert Iger and Chief Financial Officer Thomas Staggs. The new contracts expire on Jan. 31, 2013, for Iger, and on April 1, 2013, for Staggs.