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Yahoo! to reject billion-dollar bid?
Negotiation on the cards…

By Reuters

Published: Monday 11 February 2008

Yahoo! is set to reject Microsoft's unsolicited bid, now worth $42bn, as too low, a source familiar with the situation said - the first clear signal the board might be prepared to negotiate and sell the internet media giant.

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The Wall Street Journal had quoted an unnamed source as saying Microsoft's offer of $31 per share was an attempt to "steal" the company and that Yahoo! was unlikely to consider anything under $40 per share - double its price in January.

At $40 per share, the value of the cash and stock deal would be worth $51.1bn.

If completed, a merger of Microsoft and Yahoo! would be the world's largest of two computer technology companies and create a formidable rival to internet search and advertising leader Google.

Yahoo! has been considering options, including negotiating a higher price and striking a deal with Google to take over its search operations to keep Yahoo! independent, The Wall Street Journal said.

The newspaper reported that Yahoo!'s board met on Friday.

No alternate bidder has emerged and Wall Street has been betting that the likeliest outcome is for Yahoo!'s board to negotiate a higher price from Microsoft.

Last Monday, Citigroup analysts spelled out various scenarios, including Yahoo! seeking a higher bid, finding another bidder, seeing the deal derailed by regulators or striking a partnership with Google.

The Wall Street firm predicted a higher bid was the most likely option but that a price of $40 per share "would seem very aggressive" because Microsoft would have a hard time justifying it against Yahoo!'s anticipated cash flows.

For that reason, Citigroup said paying $30 to $31 per share for Yahoo! was "reasonable".

Microsoft's initial offer fails to take account of the risk that a merger between the world's largest software maker and Yahoo! would be rejected by regulators, The Wall Street Journal reported, citing "a person familiar with the situation".

In a series of meetings over the past week, Yahoo!'s board has been weighing what alternatives the company may have.

Yahoo! spokeswoman Tracy Schmaler declined to comment on any specific actions of the board.

Schmaler said: "Yahoo!'s board is carefully and thoroughly evaluating the Microsoft proposal in the context of all of the company's strategic alternatives."

A Microsoft spokesman also declined to comment.

Microsoft's half-stock, half-cash offer was originally worth $44.6bn or $31 per share - a 62 per cent premium to Yahoo!'s stock price. Since then, Microsoft shares have fallen and the deal is now worth $41.8bn.

A $40 price would represent a 109 per cent premium to Yahoo!'s close at $19.18 per share on 31 January, before Microsoft went public with its bid.

Yahoo! stock last traded above $40 two years ago, before competitive pressures from Google, management defections and repeated restructuring moves chopped the price to below $20.