Yahoo expected to reject Microsoft; Microsoft expected to raise bid

UPDATED 2/12: Microsoft's reponse to Yahoo's rejection leaves all possibilities open. It uses the same slightly threatening tone that is the hallmark

of Microsoft's inter-industry relations: "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." Will Microsoft's leaders move to a hostile takeover? Will they raise the bid? Will Yahoo back down and accept the bid (with some meaningless face-saving compromise thrown in)?

The Washington Post is reporting today that Yahoo has approached AOL, looking for a merger that would be an alternative to being owned by Microsoft. Stay tuned as the saga continues.

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UPDATED: The official news is here: Yahoo confirmed the rumors and rejected Microsoft's US$44.6 billion cash-and-stock offer, saying the unsolicited proposal was too low. The Wall Street Journal reported over the weekend that Yahoo's board was likely to turn Microsoft's offer down, claiming the bid, at $31/share was too low. Pundits are saying that Microsoft is likely to raise its bid. Some analysts are saying that the news simply signals the counterbidding stage of the merger (meaning no others are out there willing to engage in a fight for Yahoo). Others say that Yahoo is still trying to get another bidder ... perhaps even a merger with AOL. Speculation of what an increased bid on Microsoft's part would look like is everywhere, including this story from CNNMoney.com which says:

For analysts at Bernstein Research, Yahoo can make a management case that its assets are 'potentially worth $37 if it outsources paid search to Google, and up to $40 if Yahoo can acquire AOL's advertising and content assets on reasonable terms.'

Bernstein said it believes Microsoft could offer at least $35 a share, but points out that a Yahoo acquisition at such a price would have a negative impact on earnings.

Stay tuned to Microsoft Subnet for more news as this story develops.