This could get ugly.
Yahoo is prepared to reject Microsoft's offer of $44.6 billion after board members met by phone, according to a report in the Wall Street Journal.
The Journal, citing an anonymous source, said the board believes the $31-per-share offer "massively undervalues" Yahoo because it doesn't account for the risks Yahoo would be taking by taking a deal that could be overturned by regulators.
Now the Internet sector is on tenterhooks until Monday, when the board will supposedly send Microsoft a letter explaining its position.
Yahoo meanwhile has taken poison pill provisions to prevent a hostile takeover, which would mean Microsoft would likely have to oust the board in order to overturn them.
Does this story sound familiar? It should. Remember in 2003 when Oracle moved in to acquire PeopleSoft? PeopleSoft had a poison pill, dug in its heels, spent a lot of money in court fighting the takeover and still became Oracle's lunch.
Yahoo may think agreeing to a deal will put it at risk if it doesn't go through, but I think Yahoo is inviting a greater risk by fighting the deal.
This raises serious questions. If Yahoo fights Microsoft in court, can it execute in the trenches? Can it resume its turnaround? Can it still innovate and put out products?
Meanwhile, an earlier report in the Journal said the directors discussed the possibility of nixing its Panama search advertising system and using Google's ad, a situation that might ensure survival, but a limp one for an Internet company (ask Ask.com or AOL). Such a deal would be sweet for both companies. Yahoo would take a big cut of these ad revenues and Google would pad its own coffers.
This would likely be met with some serious scrutiny and even opposition from the Federal Trade Commission and the European Commission, which would regard such a pact between the No. 1 and No. 2 search vendors as anti-competitive. Can't you just hear the Center for Digital Democracy screaming bloody murder?
Probably doesn't matter, as the Journal said executives all but spit on such a proposition: A lot of effort was put forth in creating that Panama search-ad system, too much perhaps for Yahoo to bear shutting it down in favor of AdWords. To shut it down is to trade failure for survival.
The board also discussed negotiating a higher bid from Microsoft, which is probably the best scenario at this point because, as the Journal points out, there are no white knights riding in to protect the company.
Microsoft has offered $31 per share, a 62 percent premium, but I think Yahoo is in position to ask for $40 per share or more to offset the risk of the deal getting squelched by the FTC or Department of Justice, as the latest Journal suggested today.
If Yahoo sends that letter this week, we should quickly see how Microsoft values Yahoo. If Microsoft is willing to pay $45 billion, I see no reason why it wouldn't go over $50 billion, even if it does grudgingly. The company has already said it would borrow money to seal the deal.