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So now that Yahoo has said no to Microsoft’s recent takeover bid, where does that leave the two companies?

Industry expectations seem to point toward Microsoft continuing its attempt to acquire the company. ABC News’ Tampa affiliate recently picked up an AP story stating as much:

Microsoft says Yahoo’s rejection of its multi-billion buyout offer is “unfortunate,” and that moving forward on a deal is in both companies’ best interest.

Microsoft Corp. said Sunnyvale, Calif.-based Yahoo Inc.’s response “does not change our belief in the strategic and financial merits of our proposal.”

The Redmond, Wash., software maker added Monday that it reserves the right to “pursue all necessary steps” to ensure Yahoo’s shareholders have a chance to benefit from the $31-per-share offer.

Opinions are mixed, however, as to whether or not Microsoft will be able to succeed in this goal. For its part, Yahoo is trying to escape Microsoft’s clutches by courting other potential buyers. According to the New York Times:

“It seems like Yahoo’s strategic options are relatively limited,” said Mark Mahaney, an analyst with Citigroup. “It is hard to see a scenario that could create as much value for shareholders as quickly as a Microsoft offer.”

The latest to have intensified talks with Yahoo is the News Corporation, but participants on both sides describe the discussions as “a long shot.”

The talks center on merging some of Fox’s interactive assets — led by MySpace — with Yahoo. The News Corporation would emerge as a major shareholder of Yahoo. It is engaged in the talks partly because, as one participant said, “there’s nothing to lose.”

The News Corporation had sought a similar combination of MySpace and Yahoo last year, people involved in the talks said, but Yahoo rebuffed the overture before a formal bid was ever made.

At the time, the News Corporation had teamed with Providence Equity Partners, a private equity firm that focuses on media. The latest round of discussions is unlikely to include Providence, these people said, though it remains a possibility.

Yahoo and the News Corporation both declined to comment.

The talks with the News Corporation follow a show of interest from Google, whose chief executive, Eric E. Schmidt, called his counterpart at Yahoo, Jerry Yang, to offer his company’s help in keeping Yahoo independent after Microsoft’s bid. The two companies discussed the possibility of Yahoo’s outsourcing its search-related ad business to Google, according to people briefed on the talks.

Among all these possibilities, the speculated merger with Rupert Murdoch’s gigantic News Corporation is getting the most attention. AP Business Writer Michael Liedtke
puts it all into perspective:

If nothing else, the possibility of Yahoo joining forces with one of the world’s largest media empires could prompt Microsoft to sweeten its bid, which was originally valued at $44.6 billion, or $31 per share.

Yahoo is believed to want at least $40 per share, or about $56 billion.

The details of the proposed News Corp. alliance were still being worked out Wednesday, according to a person familiar with the situation. The person didn’t want to be identified because the talks are considered confidential.

Most analysts believe Microsoft will do whatever necessary to buy Yahoo because the world’s largest software maker views the acquisition as the best way to counteract Google Inc.’s dominance of the online search and ad markets - a battleground that is rapidly reshaping the technology and media industries.

The News Corp deal may be a long-shot, but analysts are having a field day speculating about it and what it would do to the Google-Yahoo competitive dynamic. Lastly, from today’s Washington Post:

A deal with Yahoo could involve a spinoff of the entire Fox Interactive group, which was under discussion last summer.

Such a combination would make News Corp. the largest single shareholder in a Yahoo/Fox Interactive unit. That would marry the world’s most popular social-networking site, MySpace, with Yahoo’s 4 billion page views per month to make a formidable opponent for Google.

Over the last three months of 2007, Yahoo’s share of all Internet searches dropped from 20 to 18 percent, according to Nielsen Online. Google’s rose from 54 to 56 percent.