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Yahoo's Microsoft Rejection May Be A Start

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By MICHAEL LIEDTKE, The Associated Press

Published: February 12, 2008

SAN FRANCISCO - Yahoo Inc.'s rejection of Microsoft Corp.'s unsolicited takeover bid left investors guessing the next move in a tense mating dance that may hatch a more imposing challenger to Google Inc. or disintegrate into a bruising brawl.

The rebuff, formally announced early Monday, wasn't a surprise because Yahoo had leaked its intention over the weekend.

As expected, Yahoo's board unanimously decided to spurn Microsoft after concluding the offer - originally worth $44.6 billion or $31 per share - "substantially undervalues" one of the Internet's prized franchises. The cash-and-stock deal is now valued at about $40 billion, or $28.91 per share, because of a drop in Microsoft's market value.

But Yahoo didn't raise antitrust concerns about the proposed deal and added language that seemed to invite a higher offer from Microsoft, the world's largest software maker.

"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 said in a statement.

Microsoft, though, didn't seem inclined to raise the bid Monday, releasing a statement describing its current bid as "full and fair."

Calling Yahoo's decision "unfortunate," Microsoft didn't back off from its quest either. "Based on conversations with stakeholders of both companies, we are confident that moving forward promptly to consummate a transaction is in the best interests of all parties," the Redmond, Wash.-based company said.

While assessing its response to Microsoft, Yahoo's board also examined a wide range of alternatives that included forging an ad partnership with Google, which paid nearly $5 billion in marketing commissions to thousands of Web sites last year.

Without identifying its sources, the Times of London also reported Yahoo is exploring a merger with Time Warner Inc.'s AOL, another popular Internet property that has been struggling in recent years. A Yahoo spokesman declined to comment on the report.

Investors appear convinced Microsoft's bid remains Yahoo's best bet, given the Sunnyvale-based company's profits have been steadily declining despite a management shake-up eight months ago and repeated promises of a turnaround extending back to 2006.

Reflecting Wall Street's belief that Microsoft will raise its bid, Yahoo shares climbed 67 cents Monday to close at $29.87. On the flip side, Microsoft's shares dropped 35 cents to finish at $28.21 as its shareholders continued to fret that a Yahoo acquisition could turn into more trouble than its worth.

Microsoft's advisers are believed to be working behind the scenes to rally support among Yahoo shareholders and determine how much more the bid needs to be raised to force Yahoo's board to negotiate a deal.

"You would assume that their first offer isn't the best and final offer," said Morton Pierce, a lawyer who advises on mergers and acquisitions for the law firm Dewey & LeBouef. "The question now is how do you get to the end game?"

Analysts are convinced Microsoft will raise its bid because it needs Yahoo to close Google's widening lead in the lucrative online search and advertising markets that are rapidly reshaping the technology and media industries.

Meanwhile, Yahoo finds itself in a bind because its stock was near a four-year low before the Microsoft bid surfaced and its management already has said things are unlikely to get significantly better until 2009.

"Both companies seem to have limited options to achieve their goals, so it appears they really do need each other," said Stanford Group Co. analyst Clayton Moran.

Although its profits have been dwindling during the past two years, Yahoo still possesses one of the Internet's biggest audiences and largest ad networks.

Still, those assets haven't been compelling enough to persuade other potential suits to counter Microsoft's bid, despite Yahoo's best efforts to drum up interest in the past week.

That could lessen the incentive for Microsoft to raise its bid. But Yahoo wouldn't have had any chance of extracting more money unless its board spurned the initial offer.

"This was a logical move by Yahoo's board, but I still think this is deal is going to get done," said Ryan Jacob, a money manager who owns Yahoo shares in an Internet investment fund bearing his name. "I think most shareholders will be ready to accept if the bid is raised to the mid-$30" per share.

Yahoo's stock price had dropped by more than 40 percent in the three months leading up to Microsoft's bid, which was announced Feb. 1.

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