Yahoo formally rejected Microsoft's unsolicited $31-a-share takeover bid today, claiming the offer — which values Yahoo at around $41bn (£21bn) — was too low.
The internet firm said it had "carefully reviewed Microsoft's unsolicited proposal with Yahoo's management team and financial and legal advisers and has unanimously concluded that the proposal is not in the best interests of Yahoo and our stockholders".
Yahoo's shares rose 0.8 per cent to $29.43 in morning trading on Wall Street, indicating that traders believe a larger bid may follow. Shares in Microsoft, which must now decide whether to come back with a higher bid, go hostile or walk away from a deal, were down almost 2 per cent.
The Yahoo board had spent 10 days reviewing the bid, during which time it fell in value by around 7 per cent along with Microsoft's share price.
The software giant is proposing to pay $31 each for half of Yahoo's outstanding shares and 0.9509 of a Microsoft share for the other half. On February 1, when the offer was announced, this valued its target at $44.6bn and was a 62 per cent premium on Yahoo's share price before the bid. But while Yahoo's shares have since soared, Microsoft's share price has dropped steadily.
Media reports over the weekend claimed Yahoo's board had concluded that a $40-a-share offer would be fair. This would value the company at more than $57bn.
The Times reported today that Yahoo was exploring tie-ups with other media companies, such as Disney or AOL, as a way of avoiding being taken over by Microsoft.
Analyst firm Sanford C Bernstein predicted in a note to clients that Microsoft would increase its offer to $35 a share and could go as high as $40.
Other analysts say Yahoo's board believes the company is worth more than $31 a share because recent changes in strategy have not yet come to fruition.
"The board is saying, 'We think we can keep the company together and do far better with it than Microsoft ever will,''' said Daniel Taylor, an analyst at research firm Yankee Group in Boston.
If the deal goes through, it would create an online search and advertising group that could rival the market leader, Google. Between them, Microsoft and Yahoo offer desktop, mobile and server operating systems, office applications, online services such as email and search, photo sharing and social bookmarking.
Microsoft made its offer just a few days after Yahoo announced a sharp drop in profits and said it would cut 7 per cent of its staff.
Some commentators believe Microsoft is unwilling to launch a hostile bid because the resultant disruption could encourage Yahoo staff to seek alternative employment, making a succesful integration of the two companies more difficult.
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