November 17, 2008 6:50 PM PST

With Yang out, Microsoft may come back

by Elinor Mills

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Updated 8:29 p.m. PST with analyst comment.

Jerry Yang's resignation as chief executive of Yahoo opens the door wide for another Microsoft offer, several sources said Monday.

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"I would expect Microsoft to come back within the next three or four months," said Eric Jackson, an activist Yahoo shareholder who was among the investors angry with Yahoo's management for not accepting Microsoft's previous bid. "I think Microsoft will come back because Microsoft needs Yahoo, despite what they've been saying publicly, and I think they know that," Jackson added.

Financial analysts also were licking their chops about the possibility. "We still believe Microsoft will eventually own Yahoo. Jerry moving out of the CEO role may accelerate this," said UBS analyst Benjamin Schacter. "Yahoo is a key strategic asset in the online space, and given the scarcity of key players of size, we see value here not reflected in the stock's current valuation."

Bank of America's analyst team expects a deal with Microsoft, too, but a narrower one. "We continue to believe a search deal with Microsoft is possible, but do not rule out an all-out deal for the company," the analysts said.

And a former Yahoo executive who asked not to be named also predicted that Microsoft would come calling now that Yang is not at the helm.

"There was a lot of bad blood during the last discussions between Yang and Microsoft executives," he said. "I would assume that Microsoft's search business cannot do well on its own. Yahoo's (search business) cannot do well on its own and it makes a lot of sense to combine."

The executive said Microsoft likely wouldn't want to buy all of Yahoo; just the search business.

Earlier this month Microsoft CEO Steve Ballmer threw cold water on a Yahoo deal. Despite Yahoo's deflated stock price, he's not interested in "going back and re-looking at an acquisition."

"We tried at one point to do a partnership around search, not advertising. That didn't work either, so we moved on, and they moved on," he said at a Committee for Economic Development of Australia lunch in Sydney on November 7.

However, neither Microsoft's nor Yahoo's search businesses have made much progress in competing against Google and both could use a boost in a downturned economy.

"Even with the bad economy and decline of Microsoft's stock price, this is a deal that makes strategic sense," Jackson said. "It's a natural time given this move for Yahoo to reassess. The board is feeling incredible pressure and guilt and anger from shareholders for passing on the deal before."

And Microsoft would get a deal this time, he predicted. "Yahoo shareholders now would be over the moon if they could get $20 a share, which is where stock was at a few weeks ago," he said.

CNET News' Stephen Shankland contributed to this report.

Elinor Mills covers Internet security and privacy. She joined CNET News in 2005 after working as a foreign correspondent for Reuters in Portugal and writing for The Industry Standard, the IDG News Service, and the Associated Press. E-mail Elinor.