April 10 (Bloomberg) -- Yahoo! Inc., resisting a $44.6 billion takeover by Microsoft Corp., may wring a higher offer out of the software maker after finding an alternate suitor in Time Warner Inc.'s AOL unit.

A new partner may help Chief Executive Officer Jerry Yang turn around investor confidence in Yahoo. Less than a week ago, his options appeared limited after Microsoft CEO Steve Ballmer threatened to cut his bid if the board refused to give in. With AOL in the fray, a better price is possible, and the New York Times said today that News Corp. may join Microsoft's offer.

``Microsoft, if it wants to stay in the game, is going to have to increase its bid,'' Larry Haverty, associate portfolio manager at Gamco Investors Inc., said in an interview with Bloomberg Television. ``Yahoo is a strategic necessity for Microsoft.''

Haverty said $35 a share is a fair value for Yahoo. His firm managed about $31 billion in assets as of Dec. 31, including shares of Microsoft and Yahoo. His estimate is 20 percent more than the implied value of the half-cash, half-stock deal.

If Microsoft teams up with Rupert Murdoch's News Corp., the transaction would unite Microsoft's MSN, Yahoo and News Corp.'s MySpace, the Times said. Microsoft's original bid is $31 a share.

Yahoo, owner of the most-visited U.S. Web site, rose 82 cents, or 3 percent, to $28.59 at 4 p.m. New York time in trading on the Nasdaq Stock Market. Microsoft rose 22 cents to $29.11, valuing its offer at about $29.34 a share.

`Rumble in the Jungle'

``There will be more rumble in the jungle,'' said Juergen Lukasser, who helps manage the equivalent of about $20 billion as head of equities at Constantia Privatbank AG in Vienna. Constantia holds Microsoft shares and no Yahoo stock. ``Microsoft will have to raise its bid.''

Diana Wong, a spokeswoman for Sunnyvale, California-based Yahoo, didn't return a call for comment. Time Warner spokesman Ed Adler declined to comment. Microsoft representative Frank Shaw didn't return a call seeking comment, and Teri Everett, a spokeswoman for New York-based News Corp., said the company doesn't comment on ``speculation.''

In a deal with AOL, Yahoo would gain control of the Internet company, receive an investment from Time Warner, and give up a 20 percent stake in the combined entity, said a person with knowledge of the talks. The investment also would let Yahoo buy back billions of dollars in stock, said the person, who asked not to be identified because the talks aren't public.

`Two Men Drowning'

``The AOL-Yahoo thing reminds me of two men drowning, both grabbing on to each other,'' said Mike Holland, who oversees more than $4 billion at Holland & Co. in New York, including Microsoft shares. ``It usually doesn't end in a pretty way or a smart way or an effective way.''

Separately, Capital World Investors, a unit of Los Angeles mutual-fund manager Capital Research & Management Co., almost doubled its stake in Yahoo to 10.1 percent. Capital World owned 135.5 million shares of the Internet company as of March 31, according to regulatory filings. The unit had previously held 69.6 million shares.

Yesterday, Yahoo said it would display some Web search advertising links sold by Google Inc. The talks with AOL and Google, owner of the most-used Internet search engine, indicate that Yang, 39, is making progress two months after telling investors that the company is seeking alternatives to Microsoft's bid. Microsoft's offer was 62 percent higher than Yahoo's closing price the previous day.

``They're delay tactics,'' Laura Martin, an analyst at New York-based Soleil Securities Corp., said of Yahoo's actions. She rates Yahoo shares ``hold'' and doesn't own any. ``They're just going to irritate Microsoft and accelerate a proxy fight.''

Time Warner

Time Warner, the world's largest media company, rose 18 cents to $14.61 in New York Stock Exchange composite trading. Shares of the New York-based company have declined 12 percent this year.

Ballmer is pursuing Yahoo to challenge Google's dominance of the $41 billion market for online advertisements. Ballmer, 52, said in an April 5 letter that Yahoo has three weeks to accept a deal or become the target of the company's first hostile takeover. Yahoo responded to Microsoft's threat of a proxy fight by insisting on a higher price.

``We continue to believe a Microsoft-Yahoo deal is the most likely outcome and continue to believe that it will happen at a higher price than the initial $31 bid,'' Citigroup Inc. analysts Mark Mahaney and Brent Thill wrote in a report today.

No Deal?

A combination with AOL would bring together the second and fourth most-used Internet search engines in the U.S. Google is the most popular, attracting 59.2 percent of queries in February, according to Reston, Virginia-based researcher ComScore Inc. Yahoo had 21.6 percent, followed by Microsoft with 9.6 percent and AOL with 4.9 percent.

Analysts including Cowen & Co.'s Jim Friedland and UBS AG's Michael Morris say a Yahoo-AOL combination is less likely than a successful Microsoft bid. Yahoo is publicly highlighting all of its options, including deals with AOL and Google, to leverage a modestly higher bid out of Microsoft, Merrill Lynch & Co. analyst Justin Post wrote in a note today.

``It's hard to see a compelling valuation proposition from AOL relative to the cash that Microsoft is offering,'' said Morris, who added that a stock buyback isn't a value creator.

Yahoo said it's starting a two-week trial in the U.S. to run Google's ads alongside no more than 3 percent of search queries. The company is looking for a way to resuscitate revenue growth after losing Internet search users to its rival.

Panama

Last year, Yahoo introduced an ad platform, called Panama, designed to make search ads more relevant and more likely to be clicked. In a presentation to investors last month, Yahoo said it had reduced the gap in revenue per search between its own engine and Google's in the U.S. by 30 percent in the first nine months of 2007. At the end of last year, a difference of 60 percent to 70 percent still existed, the company said.

While a partnership with Google may cut Yahoo's costs, a deal would face stiff regulatory scrutiny. Senator Herb Kohl, a Wisconsin Democrat, said yesterday that the Senate Judiciary Committee, which he chairs, would examine any formal agreement to ``ensure that it does not harm competition.''

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

Last Updated: April 10, 2008 16:27 EDT