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Tickers in this Article: YHOO, GOOG, MSFT, NWS, TWX
Yahoo (Nasdaq:YHOO) simply can't afford to hold out for a better purchase bid from Microsoft (Nasdaq:MSFT). On April 1, The Wall Street Journal reported that Microsoft is refusing to sweeten its original $31 per share bid price for the floundering internet giant. Taking into consideration the absence of competing bidders and the plunging values of technology stocks, it's hard for Microsoft to justify paying any more. Unless Yahoo's management shows a willingness to do a deal soon, Yahoo investors ought to think about taking profits.

No Bidding War for Yahoo
It's no surprise that Microsoft does not feel the need to pay more for the business as no white knights have emerged. Although Yahoo reportedly held talks with News Corp. (NYSE:NWS) and Time Warner's (NYSE:TWX) AOL division, neither one has yet to publicly announce an offer. With no rival suitors, Microsoft has little motivation to up the stakes. It's hard to imagine the software giant bidding against itself. (For related reading, see How The Big Boys Buy.)

Yahoo is looking less valuable as time goes on. In the two months since Microsoft went public with its 50/50 cash/stock purchase offer, we've seen a hefty downturn in the technology stock market. More than 10% has been sheared from the value of Microsoft shares. As Microsoft's stock has fallen, so too has the value of its Yahoo bid, which by my calculations is now worth $29.39. Meanwhile, shares of Yahoo's closest peer Google (Nasdaq:GOOG) have plunged nearly 17%. If you were to knock the same 17% from the value of Microsoft's current offer, Yahoo shares would be worth just $24.40 each.

What's the Word On the Street?
It's not simply that technology stocks have been falling since the purchase offer was announced. Judging by the downward trajectory of Yahoo's share price over the past week, Wall Street appears less confident that Microsoft will proceed with the deal and also unimpressed by Yahoo management's recent campaign to paint a rosy picture of future growth.

Of course, Yahoo stock was priced as high as $46 in early 2006. But that doesn't mean it's now cheap. Despite growth in online advertising revenue, profit margins have been declining relentlessly in recent quarters. According to market researcher comScore, market share is slipping away. Yahoo shares are historically low for a reason, and it's not entirely obvious that Yahoo management has a plan to fix things.

Bottom Line
Yahoo shares jumped to more than $30 from $19.18 when news of Microsoft's offer first broke. If the deal dries-up, the shares could swiftly return to that level. At the same time, the odds of the bid going above $31 look slim. With risk weighted to the downside, in my view, Yahoo shareholders might want to start looking for an exit.

For tips on creating an exit plan, check out To Sell Or Not To Sell and The Art Of Selling A Losing Position.

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