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Internet media pioneer Yahoo said Monday that it turned down Microsoft's unsolicited January 31 $44.6 billion  takeover bid, dismissing the offer as "not in the best interests of Yahoo," and because it "substantially undervalues" the firm. The rejection was largely anticipated, as weekend reports surfaced that Yahoo's board of directors spurned the offer in a late Friday meeting, and leaves Microsoft to decide whether to increase its bid, stop its pursuit of the Internet's second most popular search engine, or turn to more hostile measures to force Yahoo or its shareholders to accept a bid. Yahoo's board is expected to send Microsoft a letter today explaining its decision to reject the half-stock half-cash offer, which at $31 per share would have represented a 62 percent premium on Yahoo's pre-offer share price, and representatives at Microsoft have said that the world's largest software maker will wait until it received Yahoo's letter before responding. Yahoo did not suggest a price at which it would agree to a Microsoft offer. Three Paragraphs Spurn Microsoft Offer With advice from its legal and financial advisors Yahoo's management team reviewed Microsoft's offer and determined that it was not best for either Yahoo shareholders or the firm's future, noting several signs of strength Microsoft may have undervalued when it proposed an acquisition :  | Recognizable global brand | | | Sizable worldwide audience | | | Sizable recent investments in online advertising platforms | | | Substantial unconsolidated investments such as Chinese e-commerce company Alibaba.com | | | Considerable growth prospects and free cash flow | While rejecting Microsoft's offer as too low, Yahoo said that its board is considering "all of its strategic options" to "maximize value for all stockholders." Some Wall Street analysts expect Yahoo's Monday rejection to be only the first of several potential back and forth maneuvers between it and Microsoft, as Yahoo tries to force a higher offer. Microsoft's Prospects Should It Continue Yahoo Pursuit Microsoft could increase its offer for Yahoo, which has an online customer base of nearly 500 million people worldwide, and some analysts suggesting that it could afford to put out $35 or - in a pinch - $40 per share, which would increase the value of the bid by between $5 billion and $12 billion. The Redmond, Washington-based company could also choose to stop pursuing Yahoo altogether and look to other acquisition possibilities to help it better compete with Internet search leaded Google, however the  option appears unlikely considering that with its move to purchase Yahoo, Microsoft has made its first unsolicited takeover attempt and would likely suffer were it to simply walk away. The most severe measure Microsoft could take would be to use its right as a Yahoo shareholder to try replacing the board of directors at Yahoo's annual elections, which begin Wednesday, with people sympathetic to Microsoft's high-payout offer, a move that could be made until March 14 when the Yahoo board election process ends. All 10 of Yahoo's board of director seats come up for election each year, timing Microsoft may have had in mind when making its initial offer according to some analysts. Should Microsoft pursue this proxy takeover measure it could set a strong tone by doing so as early as Wednesday, or instead wait and see how negotiations move forward before the March 14 deadline. Yahoo could choose to file antitrust complaints against Microsoft should it take this approach. Wall Street sees the merger battle as a distraction at Microsoft, even were the deal to go through. If Microsoft successfully acquires Yahoo, it will need to confront the problems associated with having a number of overlapping services that are offered by each firm independently at present. A writer for Reuters recently dubbed a combination of the firms, with two of each type of service in many cases, a "Noah’s Ark of a Web company," and the timely problem of combining these services could handicap Microsoft while rival Google forges on. Microsoft's chief financial officer Christopher Liddell is expected to play a prominent role in determining how his firm responds to Yahoo's rejection Monday. Although generally considered to a disciplined and strong CFO, the self-titled "gatekeeper of funding" at Microsoft may be weary at lunching a proxy maneuver in the Yahoo negotiations, as it could serve to drive key Yahoo employees away. Yahoo's Options To Fend Off Microsoft In a new effort to avoid the grips of Microsoft, Yahoo may be looking to resume merger negotiations with Time Warner Inc.'s AOL Internet property, according to a Monday London Times report. Previous talks between the two firms reportedly failed due to financial disagreements. Among AOL stakeholders is Google, which owns five percent of the firm. How long Yahoo shareholders can hold out during a takeover battle remains to be seen, however the prospect of large cash gains and potential direct pressure from Microsoft to accept an offer may be all that some need in order to approve of the proposed buyout. Should Microsoft force a Yahoo proxy board election, shareholders who are for the Microsoft deal could make their voices heard and help quicken the pace of change at Yahoo, which last month largely disappointed investors with 2008 earnings forecasts and a cutback of 1,000 jobs. Since Microsoft made its offer, millions of shares of Yahoo stock have been purchased by a type of hedge funds that most often look to profit through quick sales, which could help Microsoft should it attempt to vote in a new Yahoo board. Yahoo Turns Down Microsoft's $44.6 Billion Bid Since Microsoft made its bid for Yahoo, which would be the biggest ever within the computer technology sector, its stock price has dropped by 14 percent, representing a $43 billion fall in market value, and Monday afternoon trading saw shares drop two percent to $27.97, while Yahoo shares were up over two percent to $29.84. Yahoo chief executive Jerry Yang has been known for his desire to keep the company he co-founded in 1995 independent, and some observers familiar with the situation see Yang and Yahoo's board of directors settling in for what may be a protracted fight with Microsoft. Related Links:
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10:43 pm on Feb. 11, 2008 (utc 0)