Shares of Yahoo rose as much as 11 percent on Tuesday, reversing earlier declines, after contradictory reports on whether buyout talks with Microsoft were heating up again.
"People are attributing huge outcomes to very small pieces of information," said Sanford C. Bernstein analyst Jeffrey Lindsay, referring to a flurry of thinly detailed stories citing unnamed sources that caused Yahoo's stock to spike.
Following a report on technology blog TechCrunch saying merger talks were back on, Yahoo shares sailed as high as $23.71 (12 pounds), a 10.5 percent rise from their Monday close and a 15 percent jump from a Tuesday session low of $20.60.
The shares erased most of the gains after TV news channel CNBC said no deal was on the table between the two companies. Other news reports had also suggested talks on a partial deal were back on. The reports all cited unnamed sources.
"It's 'he said, she said,'" Canaccord Adams analyst Colin Gillis said.
Both Microsoft and Yahoo declined to comment.
Yahoo shares settled back to trade up 1.6 percent at $21.80 in late Nasdaq trading. The stock had traded down around 3 percent early in the day after a downgrade by broker Thomas Weisel Partners that argued Yahoo was worth only $18 a share.
TechCrunch cited multiple unidentified sources saying Microsoft was back in talks to buy all of Yahoo, after walking away in May.
In June, Yahoo turned down Microsoft's estimated $9 billion offer to buy a 16 percent stake in the company as well as Yahoo's search business.
"The information we have is thin, but what one source is saying (is) that Microsoft is talking a price lower than the $33 they were offering (per share) when the talks disintegrated in May," the TechCrunch report said.
Reports of a rekindling of talks gave hope to Yahoo investors incensed over what was perceived as the botched handling of Microsoft's initial overtures in January.
"The options in Yahoo are very susceptible to any sort of speculation on a strategic partnership that might put the company on a more resolute path," said Rebecca Engmann Darst, equity options analyst at Interactive Brokers Group. She cited heavy buying in Yahoo July calls valued at $22.50 and $25.
Yahoo has said it remained open to more talks with Microsoft.
On Monday, CNET Networks Inc's technology news website News.com reported on its blog that Microsoft was willing to sweeten its earlier offer for a partial purchase of Yahoo's search business, citing one unidentified major investor.
Microsoft shares fell 17 cents, or 0.6 percent, to $27.80 on Nasdaq after the reports.
Gillis said Yahoo does not have the luxury of time to stay independent as U.S. economic weakness appears to be sapping the pace of growth in the display advertising business -- ads that are prized by corporate marketers and serve as Yahoo's revenue mainstay.
The Canaccord Adams analyst warned that even if Yahoo does not disappoint Wall Street with its second-quarter report due out later in July, then the economic drag on advertising would likely show up by its third-quarter results.
"A miss would be brutal to the stock," he added.
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