Yahoo's revenues up 14% as China deal pays off

Yahoo made its final gambit last night in the long-running chess game with Microsoft, posting quarterly results that it said justified winning an increased price for any takeover by the software giant.

The results showed that a 14 per cent increase in revenues and a $401m profit on its stake in the Chinese company helped it increase net income, too, but the early reaction on Wall Street was one of disappointment.

Analysts had been expecting Yahoo to pile in as much good news as possible before Micro-soft's Saturday deadline for accepting its offer. Yahoo shares dipped by up to 1 per cent in after-hours trading as investors judged the figures too little too late to persuade Microsoft to dramatically raise its price.

"Microsoft is breathing a sigh of relief," said Jim Friedland, analyst at Cowen & Co. "Even though these are solid results, given long and short-term challenges, there's been no overall shift in Yahoo's business. Micro-soft's offer is still the best offer on the table. The trends are still the trends."

Yahoo – like Microsoft's MSN business – has been trounced by Google in the battle of the internet search engines, and Google is better at making money from placing ads alongside search results. Steve Ballmer, Microsoft's chief executive, has been arguing that a combination with Yahoo would establish a strong No 2 in the search business.

Jerry Yang, Yahoo's chief executive, insisted last night that the company was making pro-gress on its own – although it would entertain alternative business combinations at the right price. The company is believed to be sounding out Time Warner's internet business AOL and Rupert Murdoch's MySpace social networking site.

Yahoo also revealed last night that it had spent more than $14m defending itself against Micro-soft, taking in advisers' fees and legal costs. Mr Yang said he was proud of the quarterly results, which were achieved by employees working in "unusually challenging circumstances".

The two sides have been in a stand-off since 1 February, when Microsoft revealed it had made a $44.6bn bid for Yahoo. Mr Yang has repeatedly rebuffed the offer, saying it undervalues the company, and Mr Ballmer has set a deadline of this Saturday for Mr Yang to change his mind or face an attempt to unseat the entire board. If Microsoft is forced to go down that route, Mr Ballmer says, he may also reduce the value of the offer.