Yahoo rejects Microsoft's offer

Firms go on offensive as $31-per-share bid said to be undervalued

Yahoo and Microsoft kept their poker faces on Monday during a delicate takeover dance.

Yahoo's board said Monday that it has rejected Microsoft's recent unsolicited $31-per-share acquisition offer, arguing that it considerably undervalues the company.

The company's rejection set the stage for what many expected to be a counteroffer, and analysts suspected during the day that Microsoft eventually could up its offer to somewhere between $35 and $40 per share, a price Yahoo's board would find more difficult to dismiss.

However, Microsoft took a tougher stance in its first reaction.

"It is unfortunate that Yahoo has not embraced our full and fair proposal to combine our companies," Microsoft said after the market closed Monday, reiterating its $31-per-share offer. "We are offering shareholders superior value and the opportunity to participate in the upside of the combined company."

The company also left the door open for taking its offer directly to shareholders.

Only the future will show whether the $31-per-share offer is indeed Microsoft's last word or if it simply took a tough position as a negotiation tactic.

In what has been termed an attempted hostile takeover, Microsoft went public with its intention to purchase Yahoo this month, though the companies had been in talks for about 18 months.

Microsoft's shares have fallen since its Yahoo bid, so the value of the half-stock and half-cash deal has dipped below the original $44.6 billion estimate. An analyst downgrade of Microsoft on Monday also didn't help matters, causing the stock to fall another 1.2% to $28.21.

Yahoo shares, which had fallen 40% in the three months leading to Microsoft's bid, have rebounded sharply. The Microsoft offer represented a 62% premium to where Yahoo traded just before the bid. If Yahoo ultimately sold for $40, that would represent more than a 100% premium.

Yahoo, led by CEO Jerry Yang, said Monday that its board "unanimously concluded that the (Microsoft) proposal is not in the best interests of Yahoo and our stockholders."

Such a position, though, would be hard to maintain if Microsoft, led by CEO Steve Ballmer, loses interest in acquiring Yahoo and the stock sinks below $20 again. Yahoo shares rose 2.3% on Monday to $29.87.

RBC Capital Markets analyst Jordan Rohan suspects that no competing bidder for Yahoo is likely to emerge, setting the table for Microsoft to acquire the firm with a bid he expects to rise to the mid-$30 range.

"Yahoo management has already exhausted the patience of its largest, longest-suffering shareholders, and Microsoft's offer allows them to save some face," he said.

Although Yahoo has struggled in recent years because of competition from Google, Microsoft still sees values in its large online audience and search and advertising businesses.

Most analysts see Yahoo's statement Monday as simply negotiation tactics. The company, according to the statement, "is continually evaluating all of its strategic options … and we remain committed to pursuing initiatives that maximize value for all stockholders."

Insiders suggested that Yahoo also is considering a partnership with Google, or other companies like Time Warner's AOL, under the assumption that such a relationship would allow Yahoo to stay independent and rejuvenate its share price.

Some suggested an all-out merger between Yahoo and AOL could make sense, though Yahoo and AOL declined comment Monday on such speculation.

Google has a 5% stake in AOL and, in the wake of Microsoft's proposal, some suggested that the search giant could buy AOL in a defensive move.

Besides simply upping its bid, Microsoft's options include engaging Yahoo's 10 board members in a proxy battle for control of the company.

Even if Microsoft is the only — or most aggressive — bidder for Yahoo, it's not a slam-dunk that the company will come away with its prize anytime soon, if at all, as some government officials would no doubt wince at the prospect of the world's most powerful software company merging with one of the Internet's premier portals.

Microsoft held meetings last week with Yahoo's biggest shareholders, and if they band together they can force Yahoo to accept Microsoft's terms, Rohan said. "Regulatory approval, on the other hand, is likely a more complicated and time-consuming process," he said.

Paul Bond reported from Los Angeles; Alex Woodson reported from New York. Georg Szalai in New York contributed to this report.