Yahoo to Gamble on Spurning Microsoft Offer

Unshaken by a two-year losing streak, Yahoo is poised to take its biggest gamble yet by rejecting Microsoft's unsolicited bid to buy the slumping Internet icon for $44.6 billion.

Paul Sakuma / AP Yahoo!'s headquarters in California.

Yahoo's board decided to spurn the takeover bid, originally valued at $31 per share, after concluding the Sunnyvale-based company is worth substantially more, a person familiar with the situation said Saturday. The person didn't want to be identified because the reasons for Yahoo's snub won't be officially spelled out until Monday morning.

With the rebuff, Yahoo is betting that it can placate its exasperated shareholders by either extracting a higher bid from Microsoft or finally engineering a long-promised turnaround that will boost its market value beyond $45 billion.

Rejecting Microsoft also raises the risk of a disruptive takeover battle that could culminate with Yahoo's 10-member board being bounced from their jobs later this year.

A hostile showdown between Yahoo and Microsoft could end up working in the favor of Internet search leader Google , whose dominance of the lucrative online search and advertising markets triggered Microsoft's takeover offer in the first place.

Although it's not directly involved in the deal, Google could still play a significant role in the final outcome. Leery of Microsoft expanding its turf on the Internet, Google already has offered to help Yahoo avert a takeover and urged antitrust regulators to take a hard look at the proposed deal.

Yahoo's board decided to spurn Microsoft after exploring a wide variety of alternatives during the past week, according to the person who spoke to The Associated Press. Microsoft and Yahoo declined to comment Saturday on the decision, first reported by The Wall Street Journal on its Web site.

Most analysts suspect Microsoft held back on its initial bid, knowing Yahoo would hold out for more money. "No one believes Microsoft has put its best and final offer on the table," said Ken Marlin, an investment banker specializing in technology and media deals. "It's a bit of Kabuki dance at this point."

The big question now is just how much higher Microsoft is willing to go. The consensus among industry analysts seems to be about $50 billion, or $35 per share, but Yahoo seems to have its mind set on at least $56 billion, or about $40 per share.

If the world's largest software maker doesn't want to raise its bid, Microsoft could try to override Yahoo's board by taking its offer directly to shareholders.

Pursuing that risky route probably will require Microsoft trying to oust Yahoo's current 10-member board, an ordeal that would be expensive and foster hard feelings that would make it more difficult to blend the two companies together if the deal went through.

Yahoo's board concluded Microsoft's offer is inadequate even though the company couldn't find any other potential bidders willing to offer a higher price.

Without other suitors on the horizon, Yahoo has had little choice but to turn a cold shoulder toward Microsoft if the board hopes to fulfill its responsibility to fetch the highest price possible, Marlin said. "You would expect Yahoo's board to reject Microsoft at first. If they didn't, they would be accused of malfeasance."

But by spurning Microsoft, Yahoo risks further alienating shareholders already upset about management missteps that have kept the company in a prolonged financial funk. Before Microsoft made its bid public in Feb. 1, Yahoo's stock had plunged 55 percent from its highs in early 2006, erasing about $35 billion in shareholder wealth.

Seizing on an opportunity to expand its clout on the Internet, Microsoft dangled a takeover offer that was 62 percent above Yahoo's stock price of just $19.18 when the bid was announced. Yahoo shares ended the past week at $29.20.

Led by company co-founder and board member Jerry Yang, Yahoo now will be under intense pressure to lay out a strategy that will prevent its stock price from collapsing again. What's more, Yang and the rest of the management team must convince Wall Street that they can boost Yahoo's market value beyond Microsoft's offer.

This isn't the first time that Yahoo has spurned Microsoft. The Redmond, Wash.-based company offered $40 per share to buy Yahoo a year ago only to be shooed away, according to a person familiar with the matter. The person didn't want to be identified because that bid was never made public.

Microsoft's decision to raise its Yahoo bid may be tempered by Wall Street's negative reaction to the initial offer. The company's stock price already has slid 12 percent since the bid was made, reflecting concerns about the deal bogging down amid potential management distractions, sagging employee morale and other headaches that frequently arise when two big companies are combined.

Mountain View-based Google is the main reason Yahoo is being pursued by Microsoft.

Yahoo has struggled largely because it hasn't been able to target online ads as effectively as Google.

Microsoft believes Yahoo's brand, engineers, audience and services will provide the company with valuable weapons in its so far unsuccessful attempt to narrow Google's huge lead in the lucrative Internet search and advertising markets.

As it examined ways to thwart Microsoft, Yahoo considered an advertising partnership with Google -- an alliance long favored by analysts who believe it would boost the profits of both companies. Not long after Microsoft announced its bid, Google CEO Eric Schmidt reportedly called Yahoo to extend a helping hand.

It was unclear Saturday if Yahoo's plans for boosting its stock price include a Google partnership, which would probably face antitrust issues.

A Microsoft takeover of Yahoo would also be scrutinized by antitrust regulators in the United States and Europe. The antitrust uncertainties could be cited as one of the reasons that Yahoo's board decided to spurn Microsoft.

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