Microhoo: Wall Street gets antsy; Microsoft's big move

Wall Street is a big prediction market and traders are increasingly getting antsy about Microsoft's next move regarding Yahoo. Thus far, Microsoft has kept people guessing, but may reveal its plan on Wednesday.

As we all know, Microsoft's negotiate or else deadline passed on Saturday and it has been radio silence ever since. The two primary moves for Microsoft are to launch a proxy war or walk away. A few days ago it was a no-brainer that Microsoft would launch a proxy war, but if you follow the stocks you see some serious uncertainty.

At one point today, the spread between Microsoft and Yahoo shares were the widest since the deal was announced. Yahoo shares dipped below $26 a share on Tuesday before closing higher based on a rather thin CNBC report that Microsoft was going to launch its proxy war on Wednesday (all coverage). Update: The Wall Street Journal reports that Microsoft may make its move "as early as Wednesday," but also doesn't seem to have concrete information what the software giant will do.

So what can we read into the Yahoo trading? For starters, the market is giving a higher probability to the idea that Microsoft could walk away or even lower its price.

Collins Stewart analyst Sandeep Aggarwal writes in a research note:

We think that the market is applying higher discounts on the risks of MSFT walking away or reducing its offer under a proxy war situation...We think that the only scenario MSFT is likely to walk away from YHOO deal is to create a situation very similar to what Oracle did when it announced the acquisition of BEA Systems (BEA System accepted Oracle's original offer, once Oracle walked away).

In other words, even if Microsoft walks it's not over.

However, it is still widely expected that Microsoft will announce its alternate slate of directors. TechCrunch has details on the alternate board candidates. In theory, Microsoft could oust Yahoo's board in one swoop if the prey holds its annual meeting anytime soon (Yahoo filed a proxy-ish amendment to its annual report earlier today).

The bigger question here is this: Is there an elegant way to seal this Microhoo deal and save face on both sides? Susquehanna Financial Group analyst Marianne Wolk reckons that there is a third option for Microsoft that allows Steve Ballmer & Co. to keep his current offer, win Yahoo and prevent a time consuming proxy war. The software giant's current bid is 50 percent cash and 50 percent shares. If Microsoft went all cash or raised the percentage of cash to stock in the deal it could win Yahoo and everyone would save face.

We'll know soon enough.

Here's a look at the various scenarios cooked up by Collins Stewart based on intraday prices (click to enlarge chart):