Now that Yahoo Inc. has formally rejected Microsoft Corp.'s $44.6 billion buyout bid, the question swirling around the biggest tech industry merger ever proposed is this:
Just how much is Microsoft willing to pay?
Even though Yahoo executives turned down Microsoft's offer of $31 a share, saying it "substantially undervalues" the company, they didn't reject the idea of a merger, and Microsoft gave no indication it was going away.
"Based on conversations with stakeholders of both companies, we are confident that moving forward promptly to consummate a transaction is in the best interests of all parties," Microsoft said in a statement yesterday after receiving Yahoo's rejection letter.
"The Yahoo response does not change our belief in the strategic and financial merits of our proposal," Microsoft said.
In its letter rejecting the Jan. 31 offer, Yahoo clearly left the door open for negotiations, something it didn't do a year ago when Microsoft made a similar unsolicited bid.
Yahoo's board said it is "continually evaluating all of its strategic options" and "remain[s] committed to pursuing initiatives that maximize value for all stockholders."
Outside observers say that will almost undoubtedly prompt Microsoft to raise its bid in coming days.
"Microsoft's bid was uninvited ... and in standard negotiating procedures you never take the first offer," said Counse Broders, a senior research director in Atlanta for Current Analysis Inc., a technology research firm.
Jordan Rohan, an analyst with RBC Capital Markets Corp., wrote in a research note that he expects Microsoft to come up with an offer of $31 to $40 a share. If so, Rohan wrote, it might be impossible for Yahoo's board to turn the company down without facing lawsuits by shareholders.
"We do not believe that Yahoo's board will be able to turn down a mid-$30s bid without another offer in hand," Rohan wrote. "Yahoo management has already exhausted the patience of its largest, longest-suffering shareholders, and [Microsoft's] offer allows them to save some face."
According to Rohan and other Wall Street analysts, Microsoft executives held several meetings last week with Yahoo's largest shareholders, even while Yahoo executives were trying to drum up a competing buyout bid from unnamed "white knights."
When Yahoo couldn't get a better bid, it "did the next most logical thing, which is to position itself to pry a higher price from [Microsoft]," Rohan wrote.
Adding to the pressure on Yahoo executives, a group of investors led by a shareholder activist in Florida announced that it is more than willing to sell its shares to Microsoft, or anybody else that comes up with a better bid.
"We are ready to tender those shares to whoever steps forward and makes the best offer," said Eric Jackson, who runs Ironfire Capital, of Naples, Fla.
Jackson said he thinks that if Yahoo doesn't take a buyout bid from Microsoft or some other suitor, Yahoo's shares will sink back to its recent price of $17 a share -- or lower.
Jackson says he owns 96 Yahoo shares but claims to have the backing of holders of some 2.2 million shares. That's a fraction of the 1.39 billion outstanding shares of Yahoo stock, but Jackson has proven he can influence Yahoo's board. He led a campaign last year that helped push Yahoo Chief Executive Officer Terry S. Semel out of the company's top job.
Other companies mentioned as potential suitors for Yahoo include Time Warner Inc.'s AOL unit, Walt Disney Co., AT&T Inc. and media behemoth News Corp.
Most of those companies have plenty to deal with already, however, including digesting large mergers or internal expansions or tackling their own problems.
Broders, the Atlanta tech industry analyst, said it would be tough for other suitors to match or beat Microsoft's bid. With more than $21 billion in cash on hand, Microsoft has some of the deepest pockets of any publicly traded company.
Yesterday, Yahoo's stock closed at $29.87, up 67 cents. Microsoft fell 35 cents a share to $28.21.