New York: Bill Miller of Legg Mason Inc,Yahoo Inc’s second-largest investor, said Microsoft Corp may return to buyout talks with the Internet company after its $47.5 billion offer was rejected.

“I’m more puzzled by Microsoft’s not going up to $37 than Yahoo’s wanting to walk away,” Miller said on Monday in an interview.

Legg Mason held 83.8 million Yahoo shares as of December, or 6.3% of the total, Bloomberg data show.

Yahoo’s demand for $5 billion more, or $37 a share compared with the offer of $33, equals just 2% of Microsoft’s market value, said Miller, who runs Legg Mason Value Trust in Baltimore. That’s little more than a daily change in Microsoft’s stock, he said.

Chief executive Jerry Yang and his team now face more pressure to produce, said Miller, who was critical of Yahoo’s plan to work with Google Inc on search advertising.

“If they want to be a viable competitor, I would expect them to come back,” said Miller, 58, whose 15-year record of beating the Standard & Poor’s 500 Index ended in 2006.

“Microsoft needs Yahoo much more than Yahoo needs Microsoft.”

Yahoo fell the most in almost two years on Monday on the Nasdaq after Redmond, Washington-based Microsoft dropped its offer. The shares slid $4.30, or 15%, to $24.37. That is still 27% higher than the $19.18 close before the bid.

Microsoft, the world’s biggest software company, fell 16 cents to $29.08, while Google advanced $13.61 to $594.90. Abandoning the Yahoo bid was better than getting into a proxy fight, Miller said. If Microsoft had won a proxy battle, it would have resulted in internal chaos, he said.

“Microsoft loses very little by walking away for a while and seeing how much pressure, if any pressure, Yahoo’s management might be under from shareholders,” Miller said.

“If I’m sitting in their shoes, I’ll go away and see what happens. I can come back and the worst case is, I’ll pay six months more of my free cash flow.”

Together the two would be a “more formidable” rival to Google, the leader in Web search, Miller said. In March, Sunnyvale, California-based Yahoo laid out sales growth targets of $7.1 billion and $8.8 billion for 2009 and 2010, higher than analysts estimated, to justify its rejection of Microsoft’s initial offer of $44.6 billion, or $31 a share.

Yahoo pointed to operations in Asia, its No. 2 position in Web search and the potential cost savings of the deal to show it was worth more.

Microsoft chief executive officer Steve Ballmer said on May 3 he wasn’t prepared to pay the $37 a share Yahoo executives demanded. Yahoo is in talks over a search-advertising arrangement with Mountain View, California-based Google, said two people familiar with the matter.

An agreement could come as soon as this week, according to one of them. Miller criticised Yang’s decision to consider letting Google handle its search-advertising business. Yahoo introduced Project Panama last year to make search ads more relevant.

Source : DNA