The story so far: Microsoft said on February 1 that it was interested in taking over Yahoo for $44.6 billion, which represented a 62% premium on Yahoo's depressed share price. Yahoo formally rejected the bid today, following media reports that Yahoo reckoned it was worth $57 billion or $40 a share.
Without taking 11 days to think about its next move, Microsoft has basically suggested that Yahoo's board has another think. Microsoft's statement says:
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.
It adds:
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.
This puts Yahoo between a rock and a hard place. If the deal dies, Yahoo's shares will plunge in value, and the shareholders who wanted to sell will not get their 62% premium. So the real question is: how many want to sell? If it's a small number, Yahoo doesn't have a problem. If it's a big number, the Yahoo board is not going to survive the fall-out.
Yahoo is playing poker with a weak hand, because it has no credible alternative to going with Microsoft. Well, not unless you think Jerry Yang is the next Steve Jobs.
Microsoft could also come under pressure from shareholders, of course, but Microsoft's shares really are undervalued compared to its real financial performance. Microsoft has a P/E of 16.05, Apple's is 28.39, and Google's is 39.20. Yahoo's is 63.55.
