Microsoft still seen with a win

Many Wall Street analysts remain confident that Microsoft fully intends to consummate the merger with Yahoo — even after a flurry of reports that AOL and News Corp. have once again entered the fray.

Late Wednesday, a person briefed on the discussions said Yahoo yhoo is in serious talks to combine some of its operations with Time Warner's twx AOL unit. The person requested anonymity because talks are ongoing.

The development emerged just a few hours after Yahoo had announced a new advertising test with rival Google.

Yahoo's intent, according to tech analysts: Get Microsoft to sweeten its opening $44.6 billion bid, now worth $41 billion since half the bid is Microsoft msft stock, which has fallen. "Yahoo is doing the right thing by exploring all options to get the best possible value for its shareholders," says IBB Consulting tech industry analyst Shahid Khan.

The potential Yahoo-AOL alliance involves a complicated cash-and-shares exchange with Time Warner, which has been looking to sell AOL, says Khan.

Meanwhile, The New York Times, relying on an unnamed source, reported Wednesday that Microsoft has instigated talks with onetime Yahoo suitor News Corp., nws exploring the possibility of combining News Corp.'s MySpace with Yahoo's online services.

Microsoft, Yahoo and News Corp. declined to comment.

Still, the wheeling and dealing underscores rising pressure from shareholders for some sort of resolution. "Microsoft was hoping that Yahoo would quietly agree," says Jeffrey Lindsay, an analyst at Sanford C. Bernstein. "But everyone underestimated the resolve of Yahoo. "

The intent of the Microsoft-News Corp. leak may be simply to highlight that News Corp. is no longer a potential Yahoo white knight, says Matt Rosoff, analyst at Directions on Microsoft.

"If nothing else, all of this creates a distraction for Yahoo," says Rosoff. Microsoft gains a fallback position: If the deal should fall through, the software giant would be in a better position to leapfrog a weakened Yahoo into the No. 2 position behind search and online advertising giant Google, goog says Rosoff.

In the context of driving toward consummation of the merger, the spate of moves and countermoves has a lot do with the price, and perhaps a little to do with egos.

Yahoo CEO Jerry Yang may have to accept that there's little he can do to command a higher bid, says Sid Parakh, tech stocks analyst at McAdams Wright Ragen. Other analysts say Microsoft CEO Steve Ballmer may have to bid more.

"There's a lot of value to be extracted here," says IBB Consulting's Khan. "Ballmer should put aside his ego and get the deal done for the good of Microsoft."

Microsoft shares closed at $29.11, up 22 cents; Yahoo shares closed at $28.59, up 82 cents.