Search engine risks bid turning hostile, and faces a challenge convincing shareholders
YAHOO, the world's second-biggest internet search engine, is risking a heated battle with software giant Microsoft after rejecting its $44.6 billion (£22.9bn) bid as "too low".After more than a week evaluating the cash-and-share offer, the Californian group announced that the bid, which when announced was at a 62 per cent premium to its share price, "substantially" undervalued the company and its prospects.Yahoo chief executive Jerry Yang, who co-founded the company in 1995 as a college student, told employees that investments and acquisitions would help attract more visitors to the company's websites. "The proposal is not in the best interests of Yahoo and our stockholders," Yang wrote in an e-mail to the group's 14,000 staff.Yahoo said its board was united in its rejection of Microsoft's offer, but continually reviewed ways to boost share value. Google, the web search leader, is understood to have offered Yahoo support and there have been suggestions it could end up providing Yahoo with its search engine in an outsourcing arrangement.Yahoo is also reported to have been considering resurrecting its merger talk with internet provider AOL.It is also thought that the company would be prepared to give in to Microsoft if it were to offer at least $40 a share, though most analysts believe a deal could be done below this level.Last night Microsoft was refusing to comment on its immediate plans. The Seattle-based company was rumoured to be prepared to turn hostile in its bid, by ousting the Yahoo board if it did not get its way. However, there have also been reports that the company is reluctant to risk alienating key Yahoo staff by taking such an aggressive approach.Microsoft began stalking Yahoo last year, frustrated at the growing dominance of Google. W
orldwide online advertising sales could top $80bn by 2011 according to some analysts. In 2007 Google's sales rose almost seven times faster than Yahoo's. Yahoo said yesterday its "global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential" gave it scope to reject the bid.But it will face a challenge convincing shareholders that plans that have yet to come to fruition will have an impact on profits.Yahoo has reported eight consecutive quarterly falls in profits, prompting a steep decline in share price before Microsoft expressed interest. In early trading yesterday the Nasdaq-listed shares had risen 35 cents to $29.55. That is about 2.5 per cent above the value of Microsoft's current offer, which after falls in its own share value, has dropped to less than $29.