If Icahn Wins And MSFT Buys Yahoo, YHOO Goes to $30. Big Whoop

As traders wait on the edge of their seats for the latest crumbs of info about the "leanings" of the great Carl Icahn--this morning, it was "leaning toward Yahoo (YHOO) proxy fight"--it's worth stepping back and looking at the risk/reward here.

Scenario 1: Icahn files board slate, gets Yahoo board fired, and gets Microsoft to agree to buy Yahoo for $33. If this happens, Yahoo's stock goes to $30-$31 (to await a year of deal purgatory, regulatory clearance, nail-biting Yahoo quarters, nail-biting Microsoft quarters, etc.).

Scenario 2: Icahn doesn't file board slate but says he's going to agitate for a merger anyway. If this happens, Yahoo's stock sinks to $25-ish where it sits until traders figure out whether Icahn generate enough shareholder pressure on Jerry Yang that he sells the company to Microsoft (see Scenario 1).

Scenario 3: Icahn throws up hands in disgust, dumps stock, and walks away. If this happens, stock gradually sinks to low $20s as investors give up hope on quick deal and worry about Yahoo's performance for the balance of the year.

Most likely? In our opinion, Scenario 2 (with, perhaps, the deke of filing a slate just to get Jerry's attention).

And if Carl instead rams the deal home? A disappointing amount of upside. If Microsoft agreed to buy Yahoo today for $33, the stock would go to about $30-$31. That would be a nice 10%-15% reward, but not, in our opinion, one that offsets at least that much risk to the downside.

See Also: Icahn May Go After Yahoo; Will Decide Today

Disclosure: Henry Blodget owns long-term positions in Yahoo and Microsoft.