Microsoft is the most likely suitor to merge with Yahoo, analysts contend, as several deals now vie for the Internet giant's future.

The software company submitted a $46 billion bid for the company earlier this year, a price Yahoo repeatedly claims undervalues the company. Sending a clear signal that it intends to pursue all options, the search leader has solicited alternate deals, including a possible merger with AOL, or partnership with arch-rival Google.

Jefferies & Co. analyst Youssef Squali argues that Yahoo is using the two big suitors mainly to ultimately get a sweeter deal from Microsoft.

While we view agreements with both AOL and Google as hairy, we believe they eventually force a Microsoft bid raise, he said. Bottom line, we believe that a 'clean' acquisition of Yahoo by Microsoft is still the most likely scenario.

Yesterday the Wall Street Journal reported that Yahoo is in talks to merge with Time Warner's AOL, combining both the firms' Internet operations. Time Warner would make a cash investment in return for a 20 percent stake in the merged company. Yahoo would then use the cash to buy back its own shares, raising its stock price somewhere between the $30 and $40 range.

In our view Yahoo management would have a difficult time convincing a majority of its shareholders this deal is worth more than Microsoft's offer, UBS analyst Heather Bellini told clients. Even if shares were repurchased at $35-plus a share, the shares likely would pull back once the buyback is done.

Meanwhile, Yahoo announced a deal with Google to test the rival's text ads on 3 percent of its search result pages. Google's text ads are more profitable than Yahoo's current offerings.

Analyst Clayton Moran of Stanford Group saw the Yahoo-Google deal as likely another negotiating tactic from Yahoo.

Microsoft's top lawyer also quickly shot back with a response, raising competition issues, which anti-trust regulators will be watching closely.

Any definitive agreement between Yahoo! and Google would consolidate over 90% of the search advertising market in Google's hands, warned Brad Smith, Microsoft's General Counsel. This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo!

A third scenario emerged when the New York Times yesterday reported that media conglomerate New Corp. was in talks with Microsoft to join in its bid. Under the terms, which have not been finalized, News Corp would contribute cash and also its interactive division - which includes MySpace - to partner with Microsoft as part of a Yahoo buyout.

Bellini questioned the difficulty and benefit of combining the different properties, saying integration risks could outweigh potential financial benefits for Microsoft.

We continue to believe [a Microsoft] deal is the most likely outcome, wrote Citi analyst Mark Mahaney in a report.

Mahaney has a $34 price target for Yahoo's stock, which today rose nearly 3 percent, to close at $28.59. Microsoft's current bid values Yahoo at $29.24 a share, in cash and stock.

Software Microsoft Yahoo Time Warner