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Yahoo!’s (YHOO) Q1 earnings were not enough to prove the case that the company is making tremendous progress. That stock dropped slightly after the news. Microsoft (MSFT) has more ammunition to show that no deal can come close to its offer to buy the portal company and guarantee investors a substantial return.

Jerry Yang and the Yahoo! board have made a fight of it, but theirs has been a victory of pluck over genius. The company never came up with an alternative to the Microsoft offer. The most it had to offer was a paper-thin forecast about the future and some lame leaks to the news media about alternative deals.

Yahoo! has one last chance, Whether it can weather the storm of shareholder objections to stay on its own is a matter best left to Nostradamus and his progeny. There is, however, one set of moves that might allow Yahoo! to remain what it is and has been for years–an independent public company.

To begin, Yahoo! would have to sell off its interest in China e-commerce company Alibaba. The management of the mainland operation doesn’t seem to think much of Yang, so the deal would not be hard to put together. Yahoo! would also have to sell its stake in Yahoo! Japan. No one knows for certain, but the two properties may be worth $8 billion. Yahoo! could use that money to buy-out many of its shareholders at a price above the Microsoft offer. Yahoo! current market cap is about $36 billion.

Next, Yahoo! would need a partner. The idea that Google could provide search capacity for Yahoo! is absurd. The two companies together would have over 85% of the US search market. The Department of Justice is not going to swallow that, even if its saves Yahoo! $500 million a year.

One options Yahoo! has is to take on News Corp’s (NWS) MySpace. The problem with the big social network is that no one can figure out how to make money on it. A cash investment in a combined company by Rupert Murdoch is not enough to make up for that.

That leaves the most obvious combination of Yahoo! with AOL. If Time Warner (TWX) would part with the property for a 25% interest in Yahoo! the merger might work. Some of the consideration from TWX would have to come in cash, perhaps $5 billion. That would give the portal firm more money to spread among its shareholders. AOL would have to contend with the fact that Google is a small shareholder in the company, and it remains to be seen if that can be negotiated.

The Yahoo! sites have over 139 million unique visitors in the US, according to comScore. AOL has almost 112 million. The link-up would certainly create the largest web operation in the country. AOL also has the largest online ad network in the US. Advertising.com reaches nine out of every ten web users. The Yahoo! ad network runs just behind AOL’s in size. Ad networks seem to be the next big thing for making money online. That part of the new company would have substantial value.

A Yahoo! merger with AOL would give Yahoo!’s search functions some more scale by being spread across the AOL audience. That would still have to be worked out with Google which has some of the AOL search rights, but Google does not want to see Yahoo! fall into Microsoft’s hands. They are likely to be accommodating.

Putting the two businesses together would also allow for substantial cost savings.

All of this may not work, but Yahoo! will at least have gone down holding something more than a pair of twos.

Douglas A. McIntyre