Citigroup: Yahoo Is a Buy

In a morning note, Citi's Mark Mahaney upgrades Yahoo to a buy as its stock trades below Microsoft's initial offer of $31 a share.

He lists two reasons it's unlikely Microsoft will walk away from the deal:

1) Despite 3-4 years of making online advertising a key strategic priority, MSFT has yet to demonstrate traction—its share of U.S. Online Advertising was flat to slightly down in '07 (7.5% vs. 7.6% in '06); 2) Google's share of U.S. Online Advertising has significantly increased (35% in '06 to 40% in '07) & the DoubleClick acquisition could materially ramp its display ad biz; and 3) No other step could potentially address the scale/liquidity challenge of MSFT's ad platform.

Mahaney says there's still a risk regulators could block the deal, but he predicts the combined market share of Yahoo/Microsoft would be small enough to win approval.

As Yahoo dances with other suitors like Time Warner, Citi sees a richer $34-a-share offer from Microsoft at the end of the rainbow and calls the strategic value of such a pairing "very significant."