Microsoft hints at hostile takeover of Yahoo!

SAN FRANCISCO - Microsoft has reacted to Yahoo!'s rejection of its $44.6bn (£23bn) takeover offer by describing it as 'unfortunate' and threatening to 'pursue all necessary steps' to realise the deal.

Yahoo! yesterday revealed its board had unanimously rejected Microsoft's proposal because it "substantially" undervalues the company. It added that it would continue to evaluate all of its strategic options.

In response, Microsoft issued the following statement, making it clear it was undeterred and hinting that a hostile takeover could be in the offing:

"It is unfortunate that Yahoo! has not embraced our full and fair proposal to combine our companies. 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.

"The Yahoo! response does not change our belief in the strategic and financial merits of our proposal. As we have said previously, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!'s shareholders are provided with the opportunity to realize the value inherent in our proposal."

Most commentators agree that the war of words is a prelude to negotiations and eventually Yahoo! yielding for the highest price it can get.

Fresh details of the weakness of its position emerged yesterday, with The New York Times reporting that Yahoo! has not received any competing offers despite exploring other alternatives. An alliance with Google is seen as unlikely and a deal with AOL is seen as one that will not solve many of Yahoo!'s problems.

In addition, a 'poison pill' defence triggered when more than 15% of Yahoo! shares become concentrated in one shareholder could be overcome, according to Bloomberg, by Microsoft replacing Yahoo!'s 10 directors, who are all up for re-election at the next annual meeting. The last annual meeting was in June.

Observers says Microsoft's options include taking its offer directly to its target's shareholders and nominating a new crop of Yahoo! board directors.

The value of the offer, because it partly consists of payment in Microsoft shares, rises and falls with Microsoft's share price. It is now worth around $42bn compared with the initial level of $44.6bn.