How fast could Yahoo! stock drop 35 percent?

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Yahoo!'s (YHOO) second quarter earnings were weak. Sales were down 13 percent. Cost-cutting was essential to the portal company's profits, which were minuscule. Carol Bartz, the new CEO, made a great deal of noise about the web site's new design. Yahoo! then gave guidance that was ugly and tentative.

Lost in all of the excitement about Yahoo!'s future was the single fact that if Microsoft (MSFT) does not make an offer to tie up its search business with the No. 2 search company, Yahoo!'s shares will go from over $17, where they trade now, straight back to $11, where they traded six months ago -- a 35 percent drop. Yahoo!'s dependence on the display ad market is an Achilles heel, particularly if the new Microsoft search engine, Bing, keeps gaining ground.

Yahoo!'s stock price is so dependent on the possibility of a partnership with Microsoft that recent rumors about the transaction pushed Yahoo!'s stock from under $14.50 to over $17 in a matter of days.

If a deal between the two companies is supposed to be imminent, there are no real signs of it. "Negotiations" have dragged on for months. The market's excitement about the deal is bound to falter if nothing happens before the end of the July.

Yahoo! is not much of a business without Microsoft. The company's guidance for the next quarter is not much better than for an operating income break-even. Without the Redmond deal, Yahoo! is dead meat.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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