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Yahoo! formally! rejects! Microsoft! offer!

Battle begins!

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!!!!! Yahoo!'s board of directors has formally rejected Microsoft's hostile takeover bid at a meeting in New York.

A statement on the company's website said: "After careful evaluation, the Board believes that Microsoft's proposal substantially undervalues Yahoo! including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments."

The directors say they continue to evaluate strategic options to maximise value for shareholders. In other words, they are trying to smoke out a bigger bid. Yahoo! is casting around for a white knight and is said by The Times to be "seeking to restart merger talk with Yahoo!". According to the paper, previous talks failed over differences over price.

But how would a merger work? Times Warner, AOL's owner, would have to swap shares in AOL for shares in Yahoo! In turn it gets an even bigger headache. And Yahoo! shareholders get no payday. According to The Times, Yahoo! is also talking to Disney - an even less likely white knight. News Corp said last week it was not interested in bidding.

Since the bid was announced Microsoft's share price has fallen while Yahoo!'s has risen, effectively meaning that Yahoo! shareholders would get better value selling their shares on the open market rather than to Microsoft. But as the New York Times' Saul Hansell notes, Yahoo!'s stock price would "sink like a stone", if people actually thought it would retain independence.

So what will Microsoft do next? The company could always sit tight and wait - but it is likely to increase its offer and take that improved price directly to Yahoo! shareholders. If Yahoo! officers continues to reject Microsoft's advances, then Microsoft could wage a proxy war to oust the board in favour of people who will support the takeover.

Yahoo's full statement is here.®

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