Or it could turn hostile, taking its offer directly to shareholders and launching a proxy fight to oust Yahoo's 10-member board to gain control of the company. Microsoft has until March 14 to nominate its own slate of candidates for Yahoo's board.
Yahoo might have resisted falling into Microsoft's outstretched arms, but that's where it will end up, analysts agreed.
"For Yahoo, this is not a question to merge or not to merge, it's just a question of how high a price can it get," said Bill Burnham, a managing partner at hedge fund Inductive Capital.
Microsoft's half-cash, half-stock offer of $31 a share represented a 62% premium when it was made Jan. 31, but the decline in Microsoft's shares has lowered the offer's original value. Yahoo, in the meantime, has benefited from Microsoft's interest. Its shares have gained at a time when many technology stocks are declining. Yahoo's stock had plunged more than 40% in the three months prior to the takeover bid.
Analysts say Microsoft could increase its offer to as high as $35 a share.
Yahoo's board did not indicate what price it would accept, but analysts are betting that the two companies settle on one, particularly in light of Yahoo's disappointing financial performance and the economic slowdown that is likely to further damp online advertising prospects.
Yahoo Chief Executive Jerry Yang, in an e-mail to employees Monday, defended the board's decision to reject Microsoft's offer. Yang said the company was on solid footing and "putting in place the pieces we need to accelerate growth."
Yang, who co-founded Yahoo in 1995 with fellow Stanford University graduate student David Filo and replaced Terry Semel as CEO in June, has been working behind the scenes to thwart Microsoft. He contends that Microsoft's offer fails to take into account Yahoo's strong brand, global Web audience, big investments in advertising technology and growth potential.
But Yang has not explained how he plans to deliver the payout that shareholders would receive by selling to Microsoft.
Yahoo is taking one step that analysts have called for: It plans to lay off 1,000 of its 14,300 workers today. The company disclosed the cuts during its fourth-quarter earnings call, as it forecast continued tough times ahead and right before Microsoft made its unsolicited bid.
