What comes next in Microsoft’s (MSFT) quest for Yahoo (YHOO)? At The New York Times, Andrew Ross Sorkin profiles Chris Liddell, a former investment banker who is now chief financial officer at Microsoft and the architect of the company’s unsolicited $42 billion cash-and-stock bid. In the wake of reports this past weekend that Yahoo’s board will reject Microsoft’s proposal as inadequate, the Times lays out some possible responses from Redmond, Wash. It says Microsoft is planning to meet with big Yahoo shareholders in an effort to pressure the Yahoo board into accepting the current deal, which is now worth just over $29 a share in cash and stock.

If that doesn’t work, the Times notes, Microsoft could raise its bid, set a deadline for its offer or start a proxy fight - though the last two sound more likely, since Microsoft is likely to believe a 62% premium to recent Yahoo trading prices is substantial enough. As Fortune’s Adam Lashinsky pointed out last week, the companies “are simply in different leagues as far as overall sophistication goes” - so it’s hard to imagine that Microsoft will let its next move be dictated by the Yahoo board’s efforts to force a higher offer. Liddell, a rugby player and triathlete, also makes a comment that seems intended to scare Yahoo shareholders, given the sharp rise in their stock since Microsoft made its move and the dearth of alternative offers. “You have to be willing to walk away,” Liddell tells the Times.

Can Yahoo (YHOO) squeeze a better offer out of Microsoft (MSFT)? The question has been floating around Wall Street in the week since Microsoft unveiled its $42 billion cash-and-stock bid for the struggling Internet company. Hopes of a better deal fed a late-week surge in Yahoo shares. They closed Friday at $29.20, just above the $29.08-a-share value of the offer at Friday’s prices (the stock half of the deal is worth $27.16 a share, given that Yahoo holders will get 0.9509 Microsoft share for each Yahoo share; the cash half is worth the stated $31 a share). Published reports Friday have a big Yahoo shareholder approaching Microsoft chief Steve Ballmer to demand a higher price and the Yahoo board meeting to discuss the offer.

One interesting response to the hubbub comes from Bespoke Investment Group, which notes that the 20 biggest Yahoo shareholders who also own Microsoft stock own much more Microsoft than they own Yahoo - five times as much, by Bespoke’s count. That’s essentially in line with the companies’ size difference, as Microsoft is worth more than six times as much in the stock market as Yahoo. But it also suggests that big Yahoo shareholders may be mindful of the consequences on Microsoft shares as they consider how high an offer to push for.

Time Warner (TWX) shares rose 4% after CEO Jeff Bewkes said the media company and publisher of Fortune wants to cut costs. Bewkes pledged to cut corporate-level spending by 15% in a move that will save $50 million, and he suggested more expenses will come under the knife later. “We’ve already saved about $1.5 billion in expenses over the past two years,” he said in an e-mail to employees. “But cost management has to be a continual process and mindset at every level of our company.”

Bewkes also said Time Warner will consider reducing its 84% stake in Time Warner Cable (TWC), and that it plans to separate AOL’s growing advertising business from its online access operation - which has been de-emphasized following a sharp, multiyear decline in subscribers. Bewkes said the separation should “give AOL greater strategic flexibility in the future” - a nod to the notion that AOL could be of greater value to other players in the Internet ad market in the light of Microsoft’s (MSFT) bid for Yahoo (YHOO).

Google’s (GOOG) aggressive comments this weekend on Microsoft’s (MSFT) bid for Yahoo (YHOO) aren’t helping its stock. Google shares, which fetched $600 as recently as the middle of last month, are struggling Monday to stay above $500. The stock briefly dropped as low as $498 and change in midday trading, down about 3%, before bouncing back to around $501. Google shares last sported a 4-handle back in August, before a late-year runup that briefly took the stock as high as $747 a share in November. Since then, the stock has lost more than $70 billion in market value. Still, the damage to anyone but the most recent buyers has been limited: Even after Monday’s declines, anyone who bought the stock before last June is still in the black.

Yahoo (YHOO) was up 49% in late afternoon trading Friday in the wake of Microsoft’s (MSFT) unsolicited $44.6 billion bid for the Internet giant, but some observers see the stock going still higher. Piper Jaffray analyst Gene Munster said in a note Friday afternoon that he believes the deal stands a 75% chance of getting done, with a 60% chance of a small rise in the price beyond Microsoft’s proposed $31 a share. “Obviously, this is Microsoft’s first public bid for Yahoo,” writes Munster, who rates Yahoo stock neutral. “Our belief is Microsoft would position, and Yahoo would view, any first bid as a negotiating starting point.” He says this despite his projection that there’s only a 5% chance of another bidder entering the action - a notion that seems to reduce any bargaining leverage on Yahoo’s part. Still, with Yahoo trading just about 10% below the deal price and Microsoft stock down almost 7%, there’s every indication that investors generally believe the deal will go through. Combining the companies “will not be an easy job,” says investment banker Marino Marin at Gruppo, Levey & Co. But Marin, who owns Yahoo stock, says he expects the deal to sail through regulatory review because creating a stronger competitor to Google (GOOG) should be good for consumers.

Microsoft’s (MSFT) bid for Yahoo (YHOO) is a rare bit of good news for Yahoo shareholders, but they’re not the only potential beneficiaries. One line of thought says the $44.6 billion proposal could help investors in Time Warner (TWX), publisher of Fortune, by giving the company a chance to sell its AOL unit. 

The prospect of Microsoft joining up with Yahoo could spur the leading Internet advertising player, Google (GOOG), to take a “counterbalancing defensive measure” such as buying AOL, says Chris Atayan, CEO at consumer products wholesaler Amcon Distributing (DIT) of Omaha, Neb., and a former investment banker. He notes that Google took a 5% AOL stake back in 2005 and says a purchase of the rest could help Google maintain its leadership cushion over a combined Microsoft-Yahoo.

Not everyone buys the notion that AOL’s fortunes have turned brighter as a result of the deal. But Atayan, who owns Time Warner stock, says the 46% rise in Yahoo shares Friday gives Time Warner chief Jeffrey Bewkes “a great chance to say here’s the valuation” that could apply to AOL. He believes Time Warner has done a good job cleaning up the AOL business since its swoon during the tech bust but adds, “AOL has never been worth more in recent years than it is now.”

Microsoft’s (MSFT) big takeover bid sent shares of Yahoo (YHOO) sharply higher, and the market rallied in early action on hopes that a merger-and-acquisition wave could be ahead. But outside of Yahoo and a few other possible takeout plays, such as online business software outfit Omniture (OMTR), investors soon lost their enthusiasm for the deal. Just before midday the Dow Jones Industrial Average was up 28 points and the Nasdaq was down 2. The weak response came in spite of another round of record profits at Exxon (XOM) and a multibillion-dollar investment by Alcoa (AA) and a Chinese aluminum company in London’s Rio Tinto (RTP). So why the long face? Len Blum, a managing director at investment banking firm Westwood Capital in New York, says Friday morning’s weak jobs report adds yet another scrap to the mounting pile of evidence that the U.S. economy is headed for a painful recession. “The Fed’s doing the right thing” by cutting rates sharply, Blum says. But referring to the continuing decline in house prices that is weighing on consumer spending, he adds, “You can’t treat walking pneumonia with a Band-Aid.”