Breaking more than a week of silence, Yahoo's board of directors Feb. 11 rejected Microsoft's purchase bid of $44.6 billion because it "substantially undervalues" the company.
After meeting with Yahoo's management team, financial and legal advisers by phone Feb. 8, Yahoo's board said Microsoft's proposal doesn't properly weigh Yahoo's brand, worldwide audience, investments in advertising platforms and future growth prospects, free cash flow and earnings potential, and investments, such as Yahoo Japan and Alibaba.
Microsoft officials declined to comment when contacted by eWEEK.
Yahoo CEO Jerry Yang reaffirmed the company's turnaround plan in an e-mail sent Feb. 11 to Yahoo employees, which was obtained by eWEEK.
"We are putting in place the pieces we need to accelerate growth by becoming a leading starting point for users and the must buy for advertisers," Yang wrote. "The global online advertising market is projected to grow from $45 billion in 2007 to $75 billion in 2010, and our more focused strategies position us to capture an even larger share of this market."
Yang highlighted Yahoo's brand, substantial operating cash flow and computing investments as reasons employees should have faith in a turnaround.
Yahoo boasts 500 million users of its Internet services, including personalized home pages, mail, music, news, sports, shopping and travel. Microsoft wants those users it could have a strong audience in front of which to position digital ads.
Yang also said he expects to grow cash flow in the double digits in 2009, providing "the financial flexibility to execute our plans." Finally, data center investments in Yahoo's computing infrastructure are expected to help the company scale better and boost algorithmic search as much as tenfold.
The board said in a statement it is evaluating all of its strategic options though a Yahoo spokesperson declined to spell out those options, telling eWEEK "we're not getting into detail on the board's review process."
Some have suggested those options include a possible tie-up with Google, in which Yahoo could abandon its Panama ad system and let the search leader feed ads on its properties. Yahoo would then get a substantial cut of the revenues.
Other reports claim Yahoo could be seeking a deal with AOL. Whichever way Yahoo turns, the company will likely be met with resistance from Microsoft, which has not yet responded to Yahoo's rejection letter.
Microsoft could sweeten the deal, bringing its offer to more than $40 a share or higher and affirming its desire for the Internet giant, whose assets would make Microsoft No. 2 to Google in the online ad market, according to a report from IDC today.
IDC analyst Karsten Weide said a merger of Microsoft and Yahoo would give the software giant 17 percent of U.S. ad market share compared to Google's 23.7 percent.
"It would not quite bring Microsoft-Yahoo to where Google is in online advertising in the U. S., but it would give them a much better fighting chance than if they went it alone," Weide said.
Microsoft offered to acquire Yahoo Feb. 1 for $44.6 billion, a 62 percent premium over Yahoo's trading price at the time.
Google Chief Counsel David Drummond said a combination of Microsoft and Yahoo would give Microsoft too many instant messaging and Webmail accounts, allowing Microsoft to create a PC software monopoly that would keep consumers from accessing competitors' e-mail, IM, and Web-based services.