Yahoo Rejects Microsoft's Bid, Takeover Battle Enters New Phase

Yahoo's board of directors unanimously rejected Microsoft's bid, which it said "substantially undervalues Yahoo."
The tug-of-war has begun. Yahoo formally rejected Microsoft's $44.6 billion purchase offer Monday morning, squarely putting the ball back in Microsoft's court for what could turn out to be a drawn out acquisition battle.

Yahoo's board of directors unanimously rejected Microsoft's bid. "The board of directors has carefully reviewed Microsoft's unsolicited proposal with Yahoo's management team and financial and legal advisors," the company said in a statement. "The proposal is not in the best interest of Yahoo and our stockholders.

Yahoo added that Microsoft's bid "substantially undervalues Yahoo." A possible reason: Microsoft's bid of $31 a share for Yahoo represents a significant premium over the company's value at $19.18 on January 31, the day before Microsoft made its bid public. But that was the lowest Yahoo's stock value has been since 2004.

Now that the initial bid has been rejected, there are several paths both companies could take. Yahoo, for one, says it is exploring other options. "The board of directors is continually evaluating all of its strategic options in the context of the rapidly evolving industry environment," Yahoo's statement said. "We remain committed to pursuing initiatives that maximize value for all stockholders."

News reports last week suggested that Google has pursued partnership options with Yahoo. Meanwhile, the Times of London reports that Yahoo may renew a three-year-old bid for AOL, itself a victim of a tech merger gone bad through its integration with Time Warner. If Yahoo decides to stay independent, co-founder and new CEO Jerry Yang may come under increasing pressure to lay out a turnaround plan for the struggling company.

For its part, Microsoft has indicated a willingness to turn its "unsolicited proposal" into something a bit more aggressive and hostile. "Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo's shareholders are provided with the opportunity to realize the value inherent in our proposal," Microsoft CEO Steve Ballmer wrote cryptically two weeks ago in a letter to Yahoo's board of directors. Microsoft could increase its bid for Yahoo, try to oust Yahoo's board of directors and take the bid directly to Yahoo shareholders, or simply drop out of the running, which isn't expected.

This initial back and forth is just the beginning of what could turn out to be a long process. If and when the two sides agree on a deal, anti-trust regulators may come into the picture. Some Congressional legislators already have begun to agitate for investigation into the deal's consequences, and the European Union has recently stepped up its aggression against what it perceives as monopolistic tactics by Microsoft. If the deal passes muster, Microsoft then faces a huge integration challenge in terms of corporate culture and technology overlap.

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