Microsoft is gearing up to take its bid to acquire Yahoo directly to the Silicon Valley company's shareholders after the expected rejection by the Yahoo board of the software group's $31-per-share offer.
Yahoo intends to turn down officially the unsolicited bid today, according to a person close to the situation.
The moves pointed to the possible outbreak of a protracted and bloody takeover battle but they are seen in some quarters as opening shots in a negotiation of how much Yahoo is worth and what Microsoft should pay to win control.
Yahoo's board held its first formal meeting on Friday to discuss the February 1 cash-and-shares offer, which is currently valued at $41.8bn. It had decided that what was on the table massively undervalued the company, the insider said.
The company is expected to send a letter to Microsoft detailing its position, including the concern that any takeover could be overturned by regulators.
Reports suggest that Yahoo would be unlikely to consider seriously an offer of less than $40 per share. That would add $12bn to the price Microsoft has to pay.
Microsoft has seen the value of its own shares fall 12 per cent since it made the bid.
The software company had been willing to pay $43 a share a year ago, when Yahoo was trading at about $28, according to a person familiar with the months of on-again, off-again talks between the two. Yahoo was trading at about $19 just before Microsoft's bid.
Yahoo's rejection of the offer could set the scene for a protracted struggle for the company. Microsoft could launch a proxy contest and seek to replace Yahoo's board at its annual meeting in June.
Steve Ballmer, Microsoft chief executive, has signalled his company's determination not to take no for an answer. In his letter making the offer, he wrote that his company "reserves the right to pursue all necessary steps".
Microsoft has a team of advisers in place for any proxy fight. It includes Alan Miller of Innisfree, the proxy solicitation firm,Joele Frank, the New York mergers and acquisition public relations specialist, and financial advisers from Blackstone Group and Morgan Stanley.
For Yahoo, Dan Burch at the MacKenzie Partners proxy firm would lobby shareholders to try to secure their votes in favour of the current board.
The expected rejection would give Yahoo time to come up with alternatives to satisfy shareholders disappointed with its poor financial performance. It is understood to be considering handing over its search advertising to Google, a move that would generate considerable revenues and cost savings. Another option would be to sell off its holdings in China and Japan to generate a special dividend.
So far there has been no indication of any "white knight" coming to Yahoo's rescue.