The bid, valued at more than $40 billion, has "created uncertainty for our employees and this uncertainty may adversely affect our ability to retain key employees and to hire new talent," Yahoo said in an annual report filed Wednesday with the Securities and Exchange Commission.
But Yahoo is fighting back.
In an effort to reassure workers, the company recently introduced an enhanced severance program. Under the plan, Yahoo employees who are axed within two years of "a change in control" of the company will receive between four months and two years of regular pay. The package also includes reimbursement for the cost outplacement services for up to two years, extended medical benefits. and accelerated vesting of stock options.
Yahoo is worried about more than just employee defections, however.
The annual report said Microsoft's bid could give customers and partners second thoughts about doing business with Yahoo. The proposal may "create uncertainty for current and potential publishers, advertisers and other business partners, which may cause them to terminate, or not renew or enter into, arrangements with us," said Yahoo.
Yahoo also warned that Microsoft's offer has created a "significant distraction" for its management, and added that the bid has lead to at least seven lawsuits against the company filed by shareholders who want Yahoo to accept the deal.
Yahoo's board of directors has publicly rejected Microsoft's $31 per share offer, insisting it "substantially undervalues" the company.
Prospects for a drawn out battle for control of Yahoo increased when Microsoft, in a regulatory filing of its own, said that its executives should now be viewed as "participants in the solicitation of proxies" with respect to the Yahoo deal.
Microsoft may attempt to convince enough Yahoo shareholders to vote for a new, merger-friendly board at Yahoo's next annual meeting -- most likely in May.