updated 4/9/2008 3:36:44 PM ET 2008-04-09T19:36:44

Microsoft Chief Executive Steve Ballmer may have a secret weapon in his fight with Yahoo Chief Executive Jerry Yang for control of the beleaguered Web portal: Yahoo shareholders who also hold gobs of Microsoft stock.

Because of the software giant's size, the biggest institutional investors around all own big chunks of Microsoft, says David Hilal, associate director of research at Friedman, Billings, Ramsey & Co. These same investors also own the big slices of Yahoo

That gives Ballmer the opportunity to put Yahoo in a stranglehold. That's because when Microsoft's Ballmer is trying to convince Yahoo shareholders to take $31 a share for their stock, he's also talking to many of his own shareholders — who won't want to see Microsoft pay too much. "Microsoft has got more leverage than people think," Hilal says. "That doesn't mean that they won't raise their bid, but this shows that Microsoft is in the driver's seat."

( is a joint venture of Microsoft and NBC Universal.)

When Hilal ran the numbers, he found that 18 of Yahoo's top 25 shareholders own more shares of Microsoft than they do of Yahoo. This is a powerful block. They own 42 percent of Yahoo shares. And, on average, Hilal found members of this group owned 4.4 shares of Microsoft for every 1 of Yahoo "There clearly are some shareholders that are a bit conflicted," Hilal says.

No kidding. Since Microsoft launched its bid for Yahoo Feb. 1, its shares have fallen more than 10 percent to $29.16 from $32.60. Shares of Yahoo, by contrast, have risen 44.42 percent to $27.70 from $19.18.

Here's the problem: if Microsoft raises its bid too much, its own shareholders will feel pain — even the ones that hold Yahoo stock. The upside they would get from those Yahoo holdings may not fully compensate them for feeling the Microsoft pinch.

Hilal offered this scenario in a report he published in late February: if Microsoft were to raise its offer by just $3 a share, its stock could conceivably fall by at least 68 cents a share, he calculates. And that would hurt, Hilal notes: the group of institutional investors with big stakes in both companies that Hilal has identified will be net losers.

Of course, Yahoo management is arguing that Microsoft's bid is too low. Yahoo, Yang argues, has a bright future on its own, long term. The problem is the institutional investors who own big chunks of stock in both company are judged on a quarter-by-quarter basis.

The names are familiar to anyone who gets a 401k statement: Capital Research & management, Vanguard Group, T. Rowe Price, and Fidelity Management & Research all hold big stakes in both companies, according to FBR.

That reality puts the latest exchange of letters between Ballmer and Yahoo in a different light. Saturday's seemingly blustery warning from Ballmer that he could lower Microsoft's bid for Yahoo — in addition to threatening to launch a proxy fight if his bid isn't accepted in three weeks — could play well with shareholders who hold stakes in both companies.

The biggest caveat in this logic is one that Hilal points out: even a "single" institutional investor is made up of different funds. It's consequently tough to ascertain whether the exact owners of Yahoo shares also own Microsoft stock.

Even so, it's a good bet that Ballmer and his financial wizards have calculated with the precision of a presidential candidate counting delegates just how many shareholders are in both the Yahoo and Microsoft camps.

So what's next? "Microsoft wants this very badly to happen, and they want it to happen on a friendly basis on a somewhat expeditious manner," Hilal says. "I still think Microsoft is likely to raise its bid a little bit."

It won't be much, however. Ballmer knows Yahoo's shareholders don't want to see him go away. "If that stock goes back to $20, that's a worst-case scenario for (Yahoo) shareholders," Hilal says.

A higher bid, Hilal argues, will be all about winning over Yahoo's managers.

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