As expected, the Yahoo board rejected Microsoft’s bid to purchase the company in a letter this morning. The board seems to be indicating an interest in the bid if the value were upped to $35-36 per share, or potentially as high as $40 per share (an amount Microsoft supposedly offered a year ago which was rejected at the time). The board said they are continually evaluating all the options to provide the best value for shareholders.

Despite the rejection, MS will not likely back down easily from the offer. Ben Romano from the Seattle Times outlined some possible responses the company has to the Microsoft rejection. The most logical first step would be to raise its bid. Another option would be to woo large Yahoo shareholders into seeing Microsoft’s point of view–which has reportedly already begun.

Moving into the more hostile arena, Microsoft could make a tender offer to purchase significant quantities of Yahoo shares, thus giving it temporary sway in the company. The most hostile approach would be to attempt to get a sympathetic board nominated to replace as much of the existing Yahoo board with pro-Microsoft votes. Then again, the company could just walk away, although most analysts see that as unlikely.

What I found interesting was the fact that Microsoft’s initial offer was both cash and stock. Given the recent decline in Microsoft shares since the announcement, the offer is now worth less and would actually cost Microsoft nearly double in terms of actual cost and depleted shareholder wealth. The declining stock price would probably have to be factored into any new offers Microsoft puts on the table.


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