Yahoo will make public a letter from its board of directors Monday morning before the US stock market opens rejecting Microsoft's $31 hostile bid for the company as "massively undervalued," sources tell me.

But another source close to the deal tells me that this cat-and-mouse negotiation is likely to yield only a slight, incremental improvement to the offer price -- if any at all -- and Yahoo's

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[YHOO  Loading...      ()   ] claims of a $40-a-share price are out of "the realm of reality."

CNBC.com

"This is a negotiation," this source tells me, "and Yahoo is doing what it can to raise the price, but the company runs the risk of exercising fiduciary responsibility and losing the deal completely. Where's the responsibility in that?"

Yahoo reportedly is ready to reject the Microsoft

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[MSFT  Loading...      ()   ] bid as too low, and will make public its desire for an offer closer to $40 a share instead. Experts I'm talking to say the suggestion indicates that Microsoft may be the only game in town, that there are no other bidders waiting in the wings with other offers.

This all comes down to newly installed Yahoo Chairman Roy Bostick who took over the role the night of the Microsoft offer. As chairman of Northwest Airlines, he's already got his hands full with the reported merger of his airline with Delta Airlines. This is a busy fella.

Also, a source with knowledge of the negotiations at the highest levels tells me speculation of a Google

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[GOOG  Loading...      ()   ] involvement in a potential partnership is extremely unlikely, whether as a potential "White Knight," or even business partner. If Yahoo outsources its Search business to Google, he says, it could spur an antitrust investigation that Google would likely lose.

He also tells me that it's almost a foregone conclusion that Yahoo will be sold to Microsoft and if the deal goes higher, it'll only go slightly higher -- $32 or $33 tops. He says the 62 percent premium that Microsoft originally offered is a "take-the-money-and-run" offer, but that Yahoo is trying to save face and give the appearance of fiduciary responsibility by not simply jumping on the first offer on the table.

This is his read as of this weekend, based on the information he has and conversations he's having.

This is a negotiation. The board rejection -- should it happen -- is likely only a first step. Think about it: if you were selling your house, would you take the first offer? This is much the same, with six or seven extra zeroes.

Fact is, no other bidder has publicly stepped forward yet.

Microsoft has three options with a Yahoo board rejection: walk away, which would be tragic for Yahoo shareholders; sweeten the deal, which could be tragic for its own shareholders (a 62 percent premium is pretty attractive); or nominate its own slate of directors to run against Yahoo's board at its upcoming annual meeting in late Spring or early Summer. Microsoft has until March 13 to make that decision.

In between now and then, the stage could be set for a boardroom battle the likes of which we haven't seen since HP and Compaq.

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