Microsoft-Yahoo: Deal or no deal?

there; or ask Microsoft to extend its deadline."

Edelman also said there was a strong possibility that Microsoft could walk away from the deal.

He said the fact that Microsoft missed its earnings estimate could mean a few things. It could mean the company needs the merger to start pushing its earnings forward and might indicate that Microsoft would increase its bid. It could also mean that Microsoft expects to have less free cash and won't attempt a takeover bid. Or, he said, it could mean that Microsoft has its own internal issues to handle and adding Yahoo on top of that would complicate matters further. In that case, he said, Microsoft would probably just drop the deal.

"Yahoo is a big loser if a deal does not take place with anybody," Edelman said. "Even though Yahoo slightly beat estimates this past quarter, it has been a troubled company for some time and there is no indication in its past earnings reports that it has passed the hump and turned things around. And Yahoo really does need a partner to maintain strength against Google."

If a deal doesn't go through. Edelman predicts that Microsoft would file an antitrust lawsuit against Google and Yahoo if they try to continue their advertising relationship.

But Edelman cautioned that while Google could probably withstand the economic impact of such a lawsuit, Yahoo could not.

"If Yahoo really needs to turn the financial corner, the last thing Yahoo needs is to get sued by Microsoft," he said. "Such a lawsuit will lead to one of two things: additional expenses for Yahoo, or it will cause Yahoo to abandon its temporary relationship with Google, which will put Yahoo right back where it was a few weeks ago where it seemed to an outsider that no doubt Yahoo needed the Microsoft deal."

The IDG News Service contributed to this report.