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Yahoo's "Rejection" Of Microsoft's Offer: What's It Really Mean?

Monday, 11 Feb 2008 | 12:50 PM ET

Microsoft stock is heading south with the market, but it's also under pressure because the street clearly expects it to up the ante in its bidding for Yahoo!

Yahoo! today didn't slam the door on a Microsoft deal when it issued a terse release on the offer. It said the $44 billion offer undervalues the company and that it is not in its best interests. But Yahoo! is clearly posturing for more money and some think it's signaling that it's not that far away from agreeing to talk to Microsoft, just by the lack of hostility in its comments.

Here's what Yahoo! said:

"Yahoo! Inc., a leading global Internet company, today said the Yahoo! Board of Directors has carefully reviewed Microsoft's unsolicited proposal with Yahoo!'s management team and financial and legal advisors and has unanimously concluded that the proposal is not in the best interests of Yahoo! and our stockholders.

After careful evaluation, the Board believes that Microsoft's proposal substantially undervalues Yahoo! including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments. The Board of Directors is continually evaluating all of its strategic options in the context of the rapidly evolving industry environment and we remain committed to pursuing initiatives that maximize value for all stockholders."

Yahoo, according to the Wall Street Journal, reportedly thinks its worth $40 per share, but it did not say that in its release. It also did not say the offer was "inadequate " nor did it raise antitrust concerns. But perhaps most important to people on the street who follow deals is that it said it would review strategic options and that it's board is committed to pursuing initiatives to "maximize value for all stockholders," meaning it's open to a deal.

Microsoft, no doubt, will say something to Yahoo!, and we think that will be later today. Unless it wants to posture more hostility, which now probably isn't in its best interest, Microsoft can only basically reiterate how great its deal would be for Yahoo and its employees.

"This little statement is probably the best Microsoft could hope for," says a trader, who is following the deal.

Microsoft offered Yahoo holders $31 but at its current price the offer is worth $28 and change. For that reason, some traders expect Microsoft to throw some more cash into the deal.

"I ultimately think it could go a little bit higher than this, but it doesn't have to go a lot," said Brendan Barnicle of Pacific Crest Securities, on "Power Lunch" today.

Yahoo Rejects Microsoft
Insight on Yahoo's refusal, with Brendan Barnicle, Pacific Crest Securities senior research analyst; CNBC's Jim Goldman & Dennis Kneale

"Either way, the money, given Microsoft's size, is relatively immaterial. You've got to remember that Microsoft generates over $5 billion a quarter in free cash flow so for them to move from $31 to $36, that's one more quarter they're pushing out the cash," Barnicle said. "Obviously, Microsoft investors might not like that idea, but given the synergies, Microsoft can make this work."

Questions? Comments? marketinsider@cnbc.com

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