Shares of Yahoo are trading at a nearly 7 percent discount to Microsoft's bid offer, but some analysts are contending that the world's largest software maker may raise the stakes to capture one of the Web's most recognizes brands.

UBS set a target price above Microsoft's $31 bid and analysts at Citi said that the Redmond-based software giant raising the stakes is one of many possible outcomes as the drama surrounding the unsolicited bid unfolds.

It's reasonable to assume that Microsoft might be willing to increase its offer, Citi's analyst Mark Mahaney said in a note.

The analyst set a $31 price target for the company but also set a 40 percent change that Microsoft would raise its bid. He also gave a 20 percent probability that Yahoo would accept the current bid and a 25 percent chance that Yahoo would outsource to Google.

Shares of Yahoo closed down 41 cents, or 1.41 percent on Wednesday.

Yahoo Inc.'s board has yet to decide on Microsoft Corp.'s $44.6 billion bid, but the directors are evaluating a wide range of potential strategic alternatives in what is a complex and evolving landscape, CEO Jerry Yang told employees Wednesday.

The Microsoft interest highlights the tremendous strength of the Yahoo brand and assets, Yang said, encouraging employees to remained focused on their works.

Citi said Microsoft wants Yahoo's Internet advertising abilities, and that deal synergies would leave the acquisition reasonably priced even at a higher bid.

But UBS set its price target for Yahoo at $34, saying Microsoft will do what is needed to get this deal done.

In a hostile deal the acquirer usually does not lead with its best and final offer and we would not be surprised to see Microsoft sweeten the pot somewhat to make the decision easier for Yahoo's board, the investment bank wrote in a note.

Investment Microsoft Yahoo Citigroup