By Mike Caggeso
Associate Editor

After months of tumultuous shareholder temperament, Yahoo! Inc. (YHOO) is giving its board and product line a makeover to convince traders of its value after turning down Microsoft Corp’s (MSFT) $47.5 billion offer, according to reports.

President Susan Decker is pushing a plan to roll several product groups under one roof (such as mail, search and home-page divisions), The Wall Street Journal reported, citing sources close to the matter.

Four executives – Brad Garlinghouse (who oversees e-mail and instant messaging), Vish Makhijani (general manager of web search), Qi Lu (top engineer for search marketing) and Joshua Schachter (founder of social bookmarking site, delicious) are leaving the company, according to TechCrunch.

Early last week, Jeff Weiner, executive vice president of the network division, left the company to work in venture capital.

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At least nine officials may have decided to leave since the deal’s rejection, Bloomberg News reported, and the reorganization could squeeze more out the door.

If billionaire investor Carl Icahn had his way, the next to go would be Yahoo Chief Executive Jerry Yang, whom Icahn said “completely botched” a profitable merger with Microsoft.

“Time to Move On”

Yang, on the other hand, is determined to keep moving forward and prove his company is worth more than Microsoft’s $33 a share offer.

A week and a half ago, Yahoo announced a partnership with rival Google Inc. (GOOG) to enhance its online advertisement business. The deal will use Google’s superior search technology in exchange for Google ads appearing on Yahoo’s search results. Yang said the deal will generate an extra $800 million a year in revenue.

“Clearly, it is time to move on, and we believe that this agreement with Google does so by strengthening our competitiveness,” Yang said.

The loss of top brass doesn’t help in the uphill battle Yahoo faces. The company’s profits have declined for eight consecutive quarters.
At noon, Yahoo’s shares were trading at $22.17 a piece, down $0.56 (or 2.46%).

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By Jason Simpkins
Associate Editor

Jerry Yang, Yahoo Inc.’s (YHOO) chief executive officer, finally got his wish last Thursday when his company partnered with rival Google Inc. (GOOG) to enhance its online advertisement business.

But while Yang insists the deal will generate an extra $800 million a year in revenue, shareholders and analysts alike are skeptical the company will be worth the $33 a share Microsoft Corp. (MSFT) was offering just months ago.

In accordance with the deal reached last week, ads from both Google and Yahoo will appear on Yahoo’s search results. Yahoo has acknowledged that Google is more efficient in targeting online search audiences, estimating the larger search engine generates up to 70% more revenue per click for its ads. And it hopes that access to Google’s AdSense technology will enhance its own targeting capabilities.

According to Yahoo, the deal could boost cash flow by $250 million to $450 million in the first 12 months of implementation. 

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Google, on the other hand, will receive added revenue from having its ads posted on the country’s No. 2 search engine.

“Clearly, it is time to move on, and we believe that this agreement with Google does so by strengthening our competitiveness,” Yang said in a statement.

What Yang would like to move on from is a $44.6 billion failed takeover bid from Microsoft that would have netted Yahoo shareholders $33 a share.

Yahoo- which has suffered through eight straight quarters of declining profits- rejected Microsoft’s offer Feb. 11, saying it substantially undervalued the company’s worth. The original $31-per-share offer valued Yahoo at a 62% premium on Feb. 1.

After its second bid was rejected, a frustrated Microsoft turned its back and walked away. This infuriated Yahoo shareholders who had seen the bid as the company’s last chance to regain profitability. A contingent led by Carl Icahn instigated a proxy battle, seeking to oust Yahoo’s current board of directors and replace it with candidates of his choosing.

Icahn owned 10 million Yahoo shares and options to buy 49 million as of May 15, Bloomberg News reported. Investors BP Capital LLC Chairman T. Boone Pickens and hedge-fund manager John Paulson are reportedly backing his slate of nine directors, which includes himself and former Viacom Inc. (VIA) chief Frank Biondi Jr. The attempted coup has major ramifications for the Google deal in that it will be void should Icahn win the battle.

Also, if Microsoft- which Icahn has worked desperately to woo back into discussions- changes its mind and makes another off for the company, it will have to pay Google $250 million to end the partnership.

In addition to interference from activist investors, the deal will also have to clear regulatory hurdles as it couples the nations two largest search engines. Both companies have said the deal does not require regulatory approval, but that they would delay its implementation for up to three and a half months to give the U.S. Department of Justice a chance to review it.

“This collaboration between two technology giants and direct competitors for Internet advertising and search services raises important competition concerns,” Sen. Herb Kohl (D-Wisc.), chairman of the Senate Antitrust Subcommittee, said in a statement. “The consequences for advertisers and consumers could be far-reaching and warrant careful review, and we plan to investigate the competitive and privacy implications of this deal further in the Antitrust Subcommittee.”

Microsoft has said in the past that a deal between Yahoo and Google would consolidate more than 90% of the search ad market.

However, even if the deal goes through, Yahoo is basically relying on its biggest rival for growth. Both Merrill Lynch & Co. Inc. (MER) and Citigroup Inc. (C) have cut their estimates on Yahoo’s stock price saying advertisers will likely shift more spending over to Google.

Yahoo’s stock fell as low as $21.83 a share, Friday, down more than 7% from Thursday’s close. Even if the deal lives up to Yang’s billing, it seems unlikely the stock will reach the $33 a share Microsoft had offered any time in the near future.

“This [deal] just reaffirms the view that Yahoo, and particularly Jerry Yang and [cofounder] David Filo, blew it,” Mark May, an analyst at Needham & Co. told Bloomberg. “It’s going to be hard for Yahoo to come back from blowing what might be, looking back, the major milestone in Yahoo’s corporate history.”

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By Mike Caggeso
Associate Editor

In his most candid comments since thwarting a takeover attempt by Microsoft Corp. (MSFT), Yahoo! Inc. (YHOO) Chief Executive Officer Jerry Yang said that he believes the once-interested suitor no longer covets a full merger.

Speaking from the stage at the D: All Things Digital conference yesterday (Wednesday), Yang said that Yahoo did not walk away from Microsoft’s $47.5 billion ($33 a share) offer, which Yang said would have created a powerful force.

But the saga between the two search-technology titans is far from over, Yang said at the conference today (Thursday).

According to a Bloomberg News report, Yang said that “they are discussing various other ideas and partnerships with us and we’re listening. They clearly have some interest in Yahoo in some shape or form.”

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An anonymous source said last week that the companies are discussing the possibility of Microsoft taking over Yahoo’s search business and buying a minority stake in its rival, Reuters reported. Part of that deal would include Yahoo selling off some of its Asia assets, including minority stakes in Yahoo Japan and China’s Alibaba.com Ltd.

A day before Yang spoke at the conference, Microsoft CEO Steve Ballmer spoke from the same stage, though he was less candid about the merger breakdown.

“It became clear there was a difference between the bid and ask,” he said.

Rocky Relationship

The status of the search-technology titans’ relationship has been at best rocky since Microsoft originally offered $44.6 billion (or $31 a share) for Yahoo in January.

Yahoo immediately rejected the terms, saying they undervalued the company. Microsoft then upped its offer to $47.5 billion (or $33 a share), which Yahoo again rejected, saying it wouldn’t accept anything under $37 a share.

In early May, Microsoft yanked its bid for Yahoo after the two companies were unable to come to terms over the buyout price.

Analysts believed Microsoft’s about-face was a ploy to lower Yahoo’s stock value and stir mutiny among its shareholders.

Whether that was the intent, that certainly has become the case.

Since the merger’s collapse, Yang’s been under heavy pressure from many of his top shareholders. One of them, billionaire Carl Icahn, said Yahoo’s board “completely botched” a successful merger with Microsoft and threatened to seek control of the board and resuscitate takeover talks, a move he said would be his way of acting on shareholders’ interest.

“The board of directors of Yahoo has acted irrationally and lost the faith of shareholders and Microsoft,” Icahn said in a letter to Yahoo Chairman Roy Bostock. “I sincerely hope you heed the wishes of your shareholders and move expeditiously to negotiate a merger with Microsoft, thereby making a proxy fight unnecessary.”

If necessary, Icahn’s strategy is to seek antitrust clearance from the Federal Trade Commission to purchase up to $2.5 billion worth of shares – about a 6% stake. Also, with all of Yahoo’s 10 board members up for re-election on July 3, Icahn will move to nominate his own list of board candidates, including Mark Cuban and himself.

At the digital D conference, Yang stood by his decision and told the crowd that the company is reorganizing around four specialties – home page, search, mail and mobile services, the Associated Press reported.

“The essence of Yahoo is being defined today,” Yang said. “We have to be incredibly relevant to the consumer. We want you to start your day at Yahoo.”

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• New York Times:
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By Mike Caggeso
Associate Editor

Carl Icahn is adding to his reputation as a boardroom bully.

In a letter to Yahoo Inc.’ (YHOO) Chairman Roy Bostock, the billionaire investor threatened to seek control of the board and resuscitate takeover talks with Microsoft Corp. (MSFT).

Two weeks ago, Yahoo Chairman of the Board and co-founder Jerry Yang rebuffed Microsoft’ $47.5 billion (or $33 a share) bid, sending shares down $4.43 (or 15%) to $24.24. That of course didn’t bode well for Icahn, who said he owns 59 million Yahoo shares.

“The board of directors of Yahoo has acted irrationally and lost the faith of shareholders and Microsoft,” Icahn said in his letter. “I sincerely hope you heed the wishes of your shareholders and move expeditiously to negotiate a merger with Microsoft, thereby making a proxy fight unnecessary.”

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If necessary, Icahn’ strategy is to seek antitrust clearance from the Federal Trade Commission to purchase up to $2.5 billion worth of shares – about a 6% stake. Also, with all of Yahoo’ 10 board members up for re-election on July 3, Icahn will move to nominate his own list of board candidates, one being Mark Cuban.

Reviving talks with Microsoft won’t be easy, as rhetoric increasingly intensified between Yang and Microsoft CEO Steve Ballmer during takeover negotiations.  

But if anyone has the experience and moxie to push talks further, it’ Icahn, who has used his clout to push action at struggling mobile phone pioneer Motorola Inc. (MOT) and drugmaker ImClone Systems Inc. (IMCL).

Most recently, Icahn has been at the forefront of Blockbuster Inc.’ (BBI) up-to $1.35 billion bid for Circuit City Stores Inc. (CC). If that deal falls through, Icahn said he would acquire the struggling electronics retailer.

In his letter to Yahoo, Icahn said the board “completely botched” a successful merger with Microsoft and that he is acting on shareholders’ behalf to establish a new board.

Icahn also penciled his name in as one of the nominees for Yahoo’ board.
“I think he’ playing his cards pretty smart here,” Troy Mastin, an analyst at William Blair & Co., told Bloomberg Television. “I wouldn’t be surprised to see Microsoft and Yahoo together in the next few months.”

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Shares of Yahoo! Inc. (YHOO) tumbled 15% yesterday (Monday) to close at $24.37 a share as investors responded to Saturday’s news that Microsoft Corp. (MSFT) would drop its $47.5 billion dollar bid for the beleaguered search engine firm.

But the tough times are just beginning for Yahoo, which must now prove why it is worth more than the lofty price Microsoft was offering.

"Yahoo is going to be under a lot of pressure," Peter Falvey, managing director at technology-merger adviser Revolution Partners, told Bloomberg News. "A lot of shareholders are going to say, ‘Hmm, maybe we overreached.’"

Microsoft originally offered $31 per share in either cash or Microsoft stock, a 62% premium to Yahoo’s Feb. 3 closing price. It boosted the bid to $33 a share, appraising Yahoo at approximately $47.5 billion, but Yahoo refused to accept anything less than $37.

Now, at $24 a share, Yahoo as a company is only worth about $33.5 billion.

That means Jerry Yang, Yahoo’s co-founder and chief executive, has the unenviable task of delivering better performance after Yahoo’s bold reprisal. In short, he’ll have to add at least $14 billion in market value to the company if he’s going to justify his decision and prove that rejecting Microsoft’s offer was the right move.

And one doesn’t have to take a very long look at Yahoo to see Yang has his work cut out for him.

Why Yahoo! Isn’t Worth $37 a Share

Last month, Yahoo reported a first-quarter profit of $542 million, or 37 cents per share, up from $142 million, or 10 cents per share last year. It was the company’s first profit increase in nine straight quarters (more than two years). But a big reason for the jump was a one-time gain of $401 million – a windfall from the sale of Yahoo’s stake in Alibaba.com Ltd.’s (PINK:ALBCF), which came from the Asian Internet company’s initial public offering (IPO).

Excluding one-time items, Yahoo reported earnings of 11 cents a share.

Even with the profit increase, the company continued to lose market share to nemesis Google Inc. (GOOG), the leader in Internet search. Yahoo accounts for 21.3 % of all U.S. searches according to comScore Inc. 

That compares with a near 60% sway for its rival, Google, which defied Wall Street’s first-quarter expectations by expanding its revenue nearly four times faster than Yahoo. While Yahoo’s sales climbed 14% last quarter, Google posted a 46% jump in revenue.
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In April, Yahoo all but acknowledged Google’s victory by outsourcing a small portion of its search advertising to its competitor on a two-week trial basis. If Yahoo continues using Google’s search advertising system, it will be abandoning its own "Panama" ad system. Launched in February, the Panama initiative set the company back millions of dollars. Even so, it continues to lag behind Google’s AdSense in terms of revenue per search query.
As it worked to bulk up its search capabilities, Yahoo had earlier shelled out $1.63 billion for Overture Services and $235 million for Inktomi. That’s close to $2 billion for search engine service specialists that would for, all intents and purposes, be rendered moot should Yahoo ultimately outsource even more of its search-related business.

While some analysts believe a bigger deal with Google may already be in the works, any serious collaboration between the United States’ two largest web portals would very likely run afoul of U.S. antitrust restrictions. Google already places ads on more than 67% of searches. The addition of Yahoo would expand its influence to 89% of searches, according to statistics from Hitwise. Microsoft said last month that Google would command more than 90% of the search advertising market.

"While Yahoo may pursue a Google search partnership as a way to appease shareholders through enhanced cash flow, we believe such a deal would face intense anti-trust scrutiny," Clayton Moran, an analyst with Stanford Group Company, told IDG News Service. "In addition it would cede control of search to Google."

Moran does not believe Yahoo’s stock will reach the $37 a share value over the next 12 to 18 months.

There have also been rumors that Yahoo will join forces with Time Warner Inc.’s (TWX) AOL or News Corp.’s (NWS) Fox Interactive Media business units. According to the details that have emerged so far, Time Warner would merge a large portion of AOL’s operations with Yahoo and make a cash investment in exchange for a 20% stake in the resulting company. Yahoo would use that cash infusion to buy back some of its own stock.

However, when it comes to Web-search market share, AOL currently ranks fourth, behind Google, Yahoo and Microsoft. So the company that emerged from that combination would be more of a content player than it would be a competitive Web-search firm.

Regardless of what Yahoo does to try to validate its decision to rebuff Microsoft, investors are already working themselves into an apoplectic frenzy over the move. Some Yahoo shareholders had already sued the company’s directors even before Microsoft decided to walk.

Enraged Yahoo shareholder Eric Jackson said Sunday that he planned to rally shareholders to withhold their votes from all Yahoo directors at the company’s annual meeting, which has not yet been scheduled. Jackson leads a group of about 140 shareholders who together own 2 million Yahoo shares.

"Significant value was left on the table," said Jackson, who heads a group of irate investors who together own about two million Yahoo shares.

Microsoft’s Next Move

In an ironic twist, Microsoft – like Yahoo – must now answer to a less-than-thrilled constituency.

Microsoft Chief Executive Steve Ballmer said April 24 that his company was willing and able to walk away from its bid for Yahoo.

"We’re prepared to move forward without a merger with Yahoo," Ballmer said at a technology conference in Italy. "We think the best way to move forward quickly is to come together with Yahoo. Hopefully that works. But if it doesn’t, we go forward. Time is money."

He lived up to his word Saturday, scrapping his company’s a $47.5 billion offer that valued Yahoo shares at a 70% premium to their January value after three agonizing months.

But now the man in charge of Microsoft must explain how the company plans to improve its eroding Internet business – which lost $228 million in the first quarter alone – without Yahoo.

Instead of the stock-price rally that many companies enjoy when they walk away from costly deals, Microsoft’s shares closed the day yesterday at $29.08, down 16 cents – hardly the vote of confidence the company would have wanted to see.

Since the company obviously has plenty of cash on hand, it may be a good idea to seek out a more agreeable partner.

"I’m looking for Microsoft to get aggressive with a buying spree," Gartner analyst Allen Weiner told IDG. "I think Microsoft should do something quickly to show the world that [the] Yahoo bid wasn’t a setback."

The company could try to strike a deal of its own with Time Warner or News Corp., or perhaps even with the trendy Facebook.com. Other analysts suspect Microsoft may be beckoned back to Yahoo’s rescue if the company fails to right its course by year’s end.

"Should Yahoo miss expectations in 2008, we would not be surprised to see MSFT come back to the table," RBC Captial analyst Ross Sandler said in a report yesterday morning.

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Microsoft Corp. (MSFT) last Saturday yanked its $44.6 billion bid for struggling Internet-search pioneer Yahoo! Inc. (YHOO) after the two companies were unable to come to terms over the buyout price.

In a statement, the software giant said it failed to win over Yahoo’s board of directors – even after boosting its bid by $5 billion. To move forward from here would require a shift into hostile mode, Microsoft said, a time-consuming and uncertainty filled process that would make Yahoo "undesirable as an acquisition candidate."

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"After careful consideration, we believe the economics demanded by Yahoo do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal," Microsoft Chief Executive Officer Steven A. Ballmer said in a statement.

It’s only been three months after heavyweight Microsoft launched its half-stock, half-cash buyout offer for Yahoo, offering a 62% premium over Yahoo’s market price. Microsoft had offered to boost its bid for Yahoo from $31 a share to $33 a share – adding that afore-mentioned extra $5 billion.

Unfortunately for Microsoft, even that higher price was nowhere near the $37-a-share offer that Yahoo co-founder and CEO Jerry Yang said it would take to get the deal done.

The details of the negotiations were contained in a letter that Ballmer sent to Yang; Microsoft released the letter to the media over the weekend. According to the letter, that extra $4 per share would have increased the cost of the deal by another $5 billion – bringing the total to nearly $55 billion.

Yahoo rejected Microsoft’s first $44.6 billion takeover offer Feb. 11, saying the bid substantially undervalued the company’s worth. The $31-per-share offer valued Yahoo at a 62% premium on Feb. 1, but Yahoo has traded as high as $31 a share as recently as November. Yang feels Yahoo is worth more than Microsoft is offering, even though the $33 per share offer is only about a dollar off of Yahoo’s 52-week high of $34.08.

Yahoo has consistently been losing market share to Google Inc.’s (GOOG) market dominance and tried to engage a number of other competitors such as Time Warner Inc. (TWX) and News Corp. (NWS) about possible partnerships, but with little success.

"This process has underscored our unique and valuable strategic position," Yang said in the statement, MarketWatch reported. "With the distraction of Microsoft’s unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history so that we can maximize our potential to the benefit of our shareholders, employees, partners and users."

As late as Friday, Yahoo shares jumped 7% with a gain of $1.86 to close at $28.67 on reports of "intensifying" talks with Microsoft and an expected deal. But with the announcement on Saturday, some analysts feel the formal rescinding of the offer and the fact that Microsoft seems unwilling to resort to a proxy contest could put downward pressure on Yahoo shares, sending the stock back down towards its 52-week low of $18.58. If that happens, Yang and Yahoo’s board of directors could find themselves with a slew of lawsuits filed by angry Yahoo shareholders.
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Over the past several days Yahoo! Inc. (YHOO) and Microsoft Corp. (MSFT) have reached a critical impasse in takeover negotiations. Ultimately, to make a deal, Microsoft might be forced to take its offer directly to Yahoo shareholders in the form of a proxy contest, or simply raise its offer to lure Yahoo to the negotiating table.

Yahoo rejected Microsoft’s $44.6 billion takeover offer Feb. 11, saying the bid substantially undervalued the company’s worth. The $31-per-share offer valued Yahoo at a 62% premium on Feb. 1, but it should also be noted that Yahoo traded at $31 a share as recently as November. In its statement Yahoo also said it was worth more because of recent acquisitions, technological developments and the firm’s investment portfolio.

Since then, Yahoo has engaged a number of other competitors such as Time Warner Inc. (TWX) and News Corp. (NWS) about possible partnerships, but with little success. Microsoft, eager to challenge Google Inc.’s (GOOG) market dominance, has grown impatient and Saturday threatened to take its case directly to Yahoo’s shareholders.

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In a letter to Yahoo’s brass, Microsoft Chief Executive Officer Steven A. Ballmer expressed his disappointment with what he perceives as a lack of cooperation.

"It has now been more than two months since we made our proposal to acquire Yahoo! at a 62% premium to its closing price on January 31, 2008, the day prior to our announcement," Ballmer wrote. "Our goal in making such a generous offer was to create the basis for a speedy and ultimately friendly transaction. Despite this, the pace of the last two months has been anything but speedy."

Ballmer pointed out that economic conditions have deteriorated since February, as have Yahoo’s web traffic and market value, making now the time to negotiate a definitive agreement.

"If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo! board," Ballmer wrote.

"That action will have an undesirable impact on the value of your company from our perspective, which will be reflected in the terms of our proposal," he added.

Yahoo responded yesterday (Monday), emphasizing in a letter to Ballmer that it does not oppose a transaction with Microsoft, so long as the offer fully reflects the value of Yahoo. Chief Executive Officer Jerry Yang and Chairman of the Board Roy Bostock, who penned the letter, also rejected Ballmer’s assertion that business has deteriorated.

"Contrary to statements in your letter, stockholders representing a significant portion of our outstanding shares have indicated to us that your proposal substantially undervalues Yahoo," they said.

"We are steadfast in our commitment to choosing a path that maximizes shareholder value, and we will not allow you or anyone else to acquire the company for anything less than its full value."

Yang and Bostock also characterized the threat of a proxy contest to displace independent board members as "counterproductive and inconsistent with [the] stated objective of a friendly transaction."

"We are confident that our stockholders understand that our independent board is best positioned to objectively and knowledgeably evaluate our company’s alternatives and to maximize value," the letter continued.

Microsoft insists there is no reason to raise its bid because Yahoo has no competing offers, but it may be forced to do just that if it wants to avoid the fiscal and social costs associated with a proxy contest.

"Microsoft doesn’t want to spend a year negotiating, playing cat and mouse with the Yahoo board and another year to close this transaction to get all the regulatory approvals," Colin Gillis, an analyst at Canaccord Adams, told Bloomberg.

Yahoo has not yet announced the date of its next shareholders’ meeting. All 10 of the company’s board members will be up for re-election. The last meeting occurred June 12, and under Delaware law, the company must hold one every 13 months.

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Yahoo! Inc. (YHOO) co-founder and Chief Executive Officer Jerry Yang sent a love note to shareholders yesterday (Thursday) explaining why the board of directors and management formally rejected Microsoft Corp.’s (MSFT) $44.6 billion hostile takeover offer.

In the letter, Yang outlined the reasons why he feels Microsoft’s offer undervalues Yahoo’s prospects including its 500 million users and lucrative advertising partnerships with eBay Inc. (EBAY), Comcast Corp. (CMCSA), AT&T Inc. (T) and over 600 newspapers. The letter is intended to quiet rumblings from shareholders who found Microsoft’s offer of $31 per share for the struggling web company attractive.

There have been various reports that News Corp. (NWS) or rival Google Inc. (GOOG) may make a competing bid to thwart Microsoft. However, most analysts feel that the high-price Microsoft is willing to pay and the regulatory concerns involved with a merger will ward off out any other potential suitors.

For instance, a deal with News Corp. would be complicated by a $900 million multiyear agreement the media giant already has in place with Google. Google handles online advertising for the media giant’s popular social networking site MySpace, a service Yahoo may be better suited to provide in the event of a tie-up.

"It’s still at the fanciful rumor stage," Jeffrey Lindsay, an analyst with Stanford C. Bernstein & Co. told BusinessWeek. "We couldn’t make the numbers add up. We don’t feel lit looks credible."

Yang and the board clearly feel they did the right thing by rejecting Microsoft’s offer, but others aren’t so certain. The current regulatory climate mandates that boards put their shareholders’ concerns first and some analysts feel the Sunnyvale, Calif.-based technology company should take another look at Microsoft’s offer.

"Doing some alternative deal is almost sure to be of less value to shareholders," Clayton Moran, an analyst with Houston-based Stanford Group, told Reuters. "You would see all sorts of lawsuits – and they would be lawsuits with merit."

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Yahoo! Inc. (YHOO) formally rejected Microsoft Corp.’s (MSFT) $44.6 billion takeover offer, yesterday (Monday). At the same time, speculation involving possible tie-ups with other industry leaders such as Time Warner Inc.’s (TWX) AOL and Google Inc. (GOOG) resurfaced.

After 10 days of review, Yahoo’s board unanimously decided that the $31 pershare offer, "substantially undervalues" the company. Yahoo didn’t name a figure the company brass would deem acceptable but many analysts believe it should be around $40 a share.

Microsoft’s offer valued Yahoo at a 62% premium on Feb. 1, but it should also be noted that Yahoo traded at $31 a share as recently as November.  In its statement Yahoo also said it was worth more because of recent acquisitions, technological developments and the firm’s investment portfolio.

"Yahoo thinks [it's] worth more because of the plans [it has] implemented that have yet to come to fruition," Daniel Taylor, an analyst at Boston-based research firm Yankee Group, told Bloomberg News. "The board is saying ‘We think we can keep the company together and do far better with it than Microsoft ever will.’"

Soon after the rejection, the Times of London reported that Yahoo had engaged in merger talks with AOL, Google and Walt Disney Co. (DIS). The paper did not identify the source of the information. 

Time Warner announced last week that it planned to break AOL’s Internet access business apart from its Web portal and advertising business. While AOL’s Internet access business has struggled, the company’s Internet content and online advertising business could be a good fit. AOL owns such web sites as MapQuest and TMZ. It also owns several advertising technology firms.

Talks between Yahoo and AOL faltered last year because of differences over price, the Times of London said. Also, any takeover attempt from Yahoo that valued AOL at more than $20 billion would also benefit rival Google, which purchased a 5% stake in the company in 2006.

Meanwhile if Yahoo were to make a deal with Google directly, it’s likely the merger would come under intense regulatory scrutiny, as the resulting venture would control nearly three-quarters of U.S web-search traffic.

While it’s certainly feasible that other parties are interested in working with the embattled Yahoo, the possibility that the company is just trying to extract a higher premium from Microsoft before folding cannot be ruled out.

Last week, in a note to clients, Citigroup Inc. (C) analyst Mark Mahaney said that it is reasonable to assume that Microsoft will be willing to increase its offer in coming weeks.

"In a hostile deal, the acquirer usually does not lead with its best and final offer and we would not be surprised to see Microsoft sweeten the pot somewhat to make the decision easier for Yahoo’s board," the note said.

News and Related Story Links:

• New York Times:
  Yahoo Said to Be Restarting Talks With AOL

• Bloomberg:
  Microsoft May Take Case for Yahoo Bid to Shareholders

• Money Morning:
  Microsoft Could Raise Bid to Further Tempt Yahoo!

• Money Morning:
  Google Chimes in on Microsoft’s Bid For Yahoo