Yahoo's decision to spurn Microsoft's $44.6 billion acquisition offer will test how far the Redmond company is willing to go to secure the giant deal.
The decision, reported over the weekend and expected to be made official Monday, leaves Microsoft with a series of options and challenges. These are some of them, based in part on recent interviews with lawyers and other experts in corporate acquisitions.
ANOTHER BID: Microsoft could treat Yahoo's rejection as a negotiating tactic, an effort to induce a larger bid.
Microsoft would then need to decide whether to boost its offer beyond the original $31 per share, which was a 62 percent premium over Yahoo's previous closing price. The Wall Street Journal, citing an anonymous source, reported that Yahoo's board feels the offer "massively undervalues" the company and that it is "unlikely to consider any offer below $40 per share."
Microsoft had no comment on Yahoo's decision as of Sunday.
But Chris Liddell, Microsoft's chief financial officer, told analysts last week that the size of the original offer was meant to make it "as easy as possible" for Yahoo to accept it.
The situation is complicated by a decline in Microsoft's share price after the Yahoo bid. Microsoft said its offer of $31 per share would be paid half in cash and half in its own stock. But Microsoft's share price has since fallen more than 12 percent, reflecting negative feelings about the Yahoo bid among some investors. As a result, Microsoft would need to give more shares than originally expected just to attain the acquisition price it proposed.
TENDER OFFER: Microsoft's original bid was limited to a public expression of interest and proposed terms -- a "bear hug," as it's known in the mergers and acquisitions trade. That left it to the Yahoo board to decide how to proceed.
With the offer rejected, Microsoft could go further and launch a formal hostile bid, making a "tender offer" to buy shares from Yahoo's shareholders. However, Yahoo could try to thwart such a move with a "poison pill" defense mechanism -- selling shares to other investors at a discount to increase the number of shares outstanding and make a takeover by Microsoft more difficult.
BOARD MANEUVER: Microsoft could nominate its own slate of directors for the Yahoo board, to push the deal through. Microsoft Chief Executive Steve Ballmer may have been hinting at this possibility in his Jan. 31 letter to Yahoo CEO Jerry Yang and the Yahoo board, saying that the company "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."
Yahoo's latest proxy statement set March 14 as the deadline for shareholders to nominate directors.
"It is a date I'm sure both parties are acutely aware of," said Doug Cogen, co-chairman of the mergers and acquisitions group at law firm Fenwick & West in San Francisco.
LET IT GO? Microsoft could, of course, decide to throw in the towel and give up the Yahoo bid. This is unlikely, given the merit that Microsoft executives say they see in the deal, and the fact that it has persisted in its pursuit despite past rejections from the Yahoo board.
Microsoft "probably expected this move," said Matt Rosoff, industry analyst at Kirkland-based research firm Directions on Microsoft. "They hit the ball over the net once and now they're going to hit it back again. It's going to go back and forth a few times."
REGULATORY REVIEW: If Microsoft ultimately reaches an agreement to acquire Yahoo, the next big hurdle would be antitrust reviews in the U.S. and Europe. Microsoft has said it expects the proposed deal to pass regulatory muster in time for the deal to close in the second half of this year.
But all the variables make it difficult to predict how regulators would view the deal, said Glenn Manishin, an antitrust lawyer at the law firm Duane Morris in Washington, D.C. The biggest challenges may involve "markets that aren't at the core of what people have considered this transaction to be about," Manishin said.
"I don't suspect that, in the final analysis, it will be deemed to be competitive or unlawful in the core search or advertising markets. Maybe the best way to compete with what some perceive to be a dominant player in the online advertising market would be to permit the acquisition of the No. 2 competitor by someone who has a lot of money but hasn't yet been successful in competing in those markets."
However, he said, there could be antitrust challenges in e-mail, instant-messaging and mobile-phone software and services -- areas where Microsoft and Yahoo are strong.
THE INTEGRATION CHALLENGE: If Microsoft gets past all those hurdles, it would then face the challenge of combining Yahoo's operations and employees with its own. An acrimonious takeover battle could make that even more difficult.
Ballmer addressed the challenge at a Microsoft event last week, saying that the company is putting a high priority on a successful integration with Yahoo, if the bid reaches that point.
"If we do that well ... that will be a very good thing for customers, our shareholders, etc.," the Microsoft chief executive said, "and if we do that poorly, we probably shouldn't have tried this acquisition."