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"No Thanks, Microsoft" ... What Now?

If Yahoo rejects Microsoft's $44.6 billion acquisition bid, as *The Wall Street Journal* has reported it will on Monday, CEO Jerry Yang is going to have to make a pretty strong argument to convince frustrated shareholders that he can turn it around, and fast.

Rejecting the bid could mean one of two things. Yahoo could be trying to lean on Microsoft for a higher offer, or it could be digging its heels in, signaling its commitment to remaining independent and fending off a hostile takeover. The *Journal* quotes an unnamed source close to the matter saying the bid "massively undervalues" the company.

The $31 per share that Microsoft offered was a 62 percent premium over the closing price of Yahoo's shares the night before it was announced. Since then, Yahoo shares have soared by more than 50 percent on reaction to the bid, closing at $29.20 on Friday.

Microsoft would already have to borrow -- for the first time ever -- to finance the transaction. It is uncertain how much higher it would be willing to go to purchase the Internet pioneer. There have been no takers on the short list of companies in a position to put in a rival bid.

Yahoo's shareholders are impatient. Jerry Yang replaced Terry Semel as chief executive last summer with the mandate of reversing the company's flagging stock price. He has not. Shareholders have filed suit against Yang and the board, claiming that it has breached its fiduciary duty. Rejecting the offer is likely to send them into orbit, and drive the share price in the opposite direction.

The *Journal* reported that Yahoo would send a letter to Microsoft detailing its reasons for rejecting the offer, which would likely include the lengthy regulatory review that could hamstring Yahoo as it continues to limp along independently.

The initial rejection could spur Microsoft to up its offer, or initiate a proxy battle in an attempt to oust the board.

A Yahoo spokeswoman reiterated that the board was "evaluating the Microsoft proposal in the context of all of the company's strategic alternatives."

What those alternatives might be -- and whether they might entail a detour over to Mountain View -- should soon become a little clearer.

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