April 4 (Bloomberg) -- Microsoft Corp. is examining whether to cut its $44.6 billion offer for Yahoo! Inc. because a U.S. economic slowdown has hurt the Internet company's business, according to two people with knowledge of the matter.

The companies haven't made progress on negotiations since Yahoo rejected the bid in February, and there are signs that Yahoo's business has since deteriorated, one of the people said. They declined to be named because the talks are private.

The possibility of a lower bid may step up pressure on Yahoo Chief Executive Officer Jerry Yang, who had sought an alternative that would appeal to investors. Since then, Federal Reserve Chairman Ben Bernanke has said the U.S. may be in a recession after losses tied to the collapse of the subprime mortgage market. The current offer is 62 percent higher than Yahoo's closing price the day before the offer was disclosed.

``They are probably realizing that by the time the fight is over, Yahoo's value will have decreased a bit in the current macro environment,'' said Jeffrey Lindsay, an analyst at Sanford C. Bernstein & Co. in New York. Yahoo's ``best opportunity was to take the Microsoft offer and turn it into friendly negotiations.'' He expects Yahoo to perform in line with its peers.

Reuters reported earlier that Microsoft was re-evaluating its offer. Yahoo spokeswoman Tracy Schmaler and a representative for Redmond, Washington-based Microsoft declined to comment. Microsoft, the world's largest software maker, offered $31 a share for Yahoo on Jan. 31. Sunnyvale, California-based Yahoo rejected the offer Feb. 11.

Stock's Performance

Yahoo fell 96 cents, or 3.4 percent, to $27.40 in extended trading after closing at $28.36 on the Nasdaq Stock Market. Microsoft climbed 51 cents to $29.67 after closing at $29.16. That values the half-cash, half-stock bid at less than $40 billion.

Microsoft is pursuing Yahoo to combine the second and third most popular U.S. Internet search engines to take on Google Inc., which now gets more than half the queries. Before the offer, Yahoo had reported eight straight quarters of profit declines. Yang, who co-founded the company, replaced Terry Semel as CEO last year to reignite growth.

Yahoo's share of the U.S. search market fell to 21.6 percent in February from 22.2 percent the previous month, while Microsoft dropped to 9.6 percent from 9.8 percent, according to Reston, Virginia-based ComScore Inc. Google rose to 59.2 percent from 58.5 percent.

Reason for Snub

On March 18, Yahoo alluded to that No. 2 position in Web search, its operations in Asia and the potential cost savings of the deal to show it's worth more than Microsoft's offer. The company said then that sales will climb at least 19 percent in each of the next two years and that growth would be higher than analysts anticipated.

The same day, Sanford C. Bernstein's Lindsay called Yahoo's growth predictions in the next two years ``too bullish'' given the U.S. slowdown. U.S. companies have recorded costs, writedowns and other investment losses of $37.3 billion since the start of 2007 because of the collapse of the U.S. subprime mortgage market, according to Bloomberg data.

The Wall Street Journal reported today that the companies failed to bridge the gulf between them after meetings this week. In rebuffing Microsoft, Yahoo said it was exploring all possible strategic options.

Yahoo, which has yet to announce an alternative, also has held talks with Time Warner Inc. and News Corp. about partnerships to avert the takeover, people with knowledge of the discussions said in February.

To contact the reporters on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; Ian King in San Francisco at ianking@bloomberg.net

Last Updated: April 4, 2008 20:01 EDT