Yahoo rejects Microsoft bid

By Daisuke Wakabayashi and Megan Davies

SEATTLE/NEW YORK (Reuters) - Yahoo Inc rejected Microsoft Corp's unsolicited $41.6 billion takeover offer as too low on Monday, forcing the software maker to either sweeten the bid or adopt a hostile approach to clinch a deal.

Microsoft responded by calling its offer fair, but stopped short of saying it would not raise its offer. Without specifying its next move, Microsoft said in a statement it reserves the right "to pursue all necessary steps."

Analysts say Microsoft will probably raise its bid, originally valued at $31 a share, to at least $35, but could be persuaded to go as high as $40. Yahoo's statement did not suggest what price its board was seeking.

"The proposal is not in the best interests of Yahoo! and our stockholders," Chief Executive Jerry Yang wrote in an e-mail to employees on Monday. "We believe Microsoft's proposal substantially undervalues Yahoo!"

Microsoft plans to complete the largest-ever computer technology merger in a bold strategic move aimed at creating a formidable rival to Web search leader Google Inc.

Yahoo said Microsoft's offer did not properly assess its global brand, its audience of some 500 million users worldwide and investments in its online advertising platform.

The offer also does not take into account growth prospects or overseas holdings, which include a stake in Chinese e-commerce firm Alibaba.com, the company said. Yahoo said its board was evaluating all its strategic options.

Redmond, Washington-based Microsoft now must decide whether to sweeten its offer, launch a proxy fight or, the least likely option, withdraw.

"The most likely outcome is they negotiate a higher price," said William Blair & Co analyst Troy Mastin. "It seems Microsoft has expressed a willingness" to go to $35 a share or $36 a share, he said.

Yahoo shares rose 67 cents, or 2.3 percent, to close at $29.87. The stock is now trading at a 3.3 percent premium to Microsoft's cash-and-stock deal value, indicating investors are expecting Microsoft to raise its bid.

A more hostile alternative could be to propose a tender offer to buy shares directly from Yahoo shareholders, although Yahoo could use a "poison pill" defense to dilute the stock holdings purchased in the market by an unwanted aggressor.

Microsoft could seek to replace Yahoo's board with directors more favorable to its point of view. Yahoo has set a March 14 deadline for shareholders to nominate directors.

"Acquisitions, especially in technology, are prone to high risk and high failure rates. Hostile transactions make it even more difficult for acquisitions to be a success," said Andy Miedler, technology analyst at Edward Jones. "Microsoft clearly knows this."

RBC Capital cut its rating on Microsoft to "sector perform" from "outperform" and cut its target price to $31 from $40, saying the company would be distracted with the acquisition and extended integration with Yahoo if successful.

Microsoft shares fell 1.23 percent to $28.21 in Nasdaq trade. The stock has lost 13 percent since the company went public with its bid for Yahoo, losing about $41 billion in market value -- close, ironically, to the amount of the bid.