Microsoft likely to get Yahoo rejection

SAN FRANCISCO -- Yahoo is expected to respond by early today to Microsoft's threat to lower the price of its buyout offer and take it directly to Yahoo shareholders, people close to the company said Sunday.

Yahoo's response is expected to reject negotiations and explain why the board believes the offer is too low. Although the initial bid was valued at $31 a share, the drop in the price of Microsoft stock has reduced the offer to just over $29 a share.

Microsoft CEO Steve Ballmer ratcheted up the pressure Saturday in a letter warning that the company would begin a proxy fight seeking to oust the board if the two companies did not reach a negotiated deal by April 26.

Senior executives from the companies have met twice but have not entered formal negotiations.

Yahoo said Microsoft's offer "substantially undervalues" the company, and people close to the company suggest Yahoo executives see no benefit to negotiating unless Microsoft raises its price.

Yahoo's board has asked Microsoft for information on antitrust issues and other matters but is frustrated by the lack of response, according to people involved in the discussions, who were granted anonymity so they could discuss the confidential maneuvering.

For its part, Microsoft has insisted it sees no reason to raise its bid, as Yahoo has no competing offers.

"Basically Microsoft infers that Yahoo has no alternative deals in the offing; therefore there is no need to raise its price," said Michael Klausner, a Stanford law professor. "Microsoft still prefers a negotiated deal to a proxy fight."

Ballmer's letter puts pressure on the board to act quickly or face the possibility that they will fail to get the best deal possible for Yahoo shareholders, Klausner said.

But waging a battle over board seats while offering a lower price for Yahoo could be a gamble for Microsoft. It is not clear Yahoo shareholders would be happy with a deal at the current price, let alone at a price that is even lower.

Still, some experts say that without an alternative, Yahoo shareholders are likely to vote in favor of a Microsoft offer, even if it is lower.

"Although shareholders may not be happy with a move like that, in general they will support a premium bid," said Morton A. Pierce, who heads the mergers and acquisitions practice at Dewey & LeBoeuf, a law firm in New York.

Pierce said Microsoft may still raise its bid.

"Generally in situations like these, people will bump their offer to avoid the monetary and social cost of going through a proxy contest," he said.