Microsoft shoots back at Yahoo

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NEW YORK (CNNMoney.com) -- Microsoft Corp. fired back at Yahoo on Monday, signaling that it wasn't backing down in its takeover attempt and calling Yahoo's decision to reject its $45 billion unsolicited bid "unfortunate."

The combination would offer shareholders "superior value" and make both companies better positioned to compete in the online services market, Microsoft argued in a statement.

Microsoft said it was still committed to the combination, and said that its conversations with shareholders of both companies found support for the deal, suggesting the software giant was poised to launch a hostile bid for Internet bellwether Yahoo.

"The Yahoo response does not change our belief in the strategic and financial merits of our proposal," said the statement. "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."

Early Monday before the market open, Yahoo formally rejected Microsoft's takeover approach, saying the offer was not in the best interest of shareholders. But Yahoo added it was willing to look at other options.

"The board believes that Microsoft (MSFT, Fortune 500)'s proposal substantially undervalues Yahoo (YHOO, Fortune 500), including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments," said the statement.

But the Yahoo statement also seemed to leave the door open to a higher offer from either Microsoft or another suitor. It said its board "is continually evaluating all of its strategic options in the context of the rapidly evolving industry environment."

"We remain committed to pursuing initiatives that maximize value for all stockholders," it said.

Shares of Yahoo, which had closed Monday up 2.3% to $29.87, rose nearly 1% in after-hours trading. Microsoft shares, which ended regular trading down 1.2%, were little changed following the statement it released after the market close.

Microsoft offered $31 a share for the firm in a cash and stock bid on Feb. 1 - a 62% premium from the previous day closing price for Yahoo.

Microsoft made that offer less than a week after Yahoo announced it would lay off 1,000 employees by mid-February, citing what CEO Jerry Yang described as "headwinds" facing the company.

Yahoo reported lower earnings in the latest quarter that still beat Wall Street's modest expectations for the company, but gave a 2008 revenue forecast that disappointed analysts.

Still, Yahoo leads in online display advertising revenue and its various Web sites are the most visited by U.S. Internet users and No. 3 worldwide, according to tracking service ComScore.

A Microsoft-Yahoo combination would create a powerful No. 2 player in the online search business, with nearly 30% of the market. But that would still be about half of the U.S. search market share that Google (GOOG, Fortune 500) now commands.

The rejection by Yahoo Monday was not a surprise and had been expected by investors since late last week. Some believe this is part of an effort by Yahoo to get a higher price from Microsoft. Microsoft's tough statement also was not unexpected.

While the offer represented a large premium from the recent pre-offer price, it only represented the price level seen for Yahoo stock in November.

But getting a higher price from Microsoft would be easier for Yahoo if an alternative bidder had presented itself. While Google has voiced criticism of the proposed deal, it's not clear that the Internet search leader would be able to make a bid for rival Yahoo. And no other company has been seen moving to make an alternative offer.

Last week, News Corp. (NWS, Fortune 500) Chairman Rupert Murdoch, who has been buying online properties for his media conglomerate, said his company would not bid for Yahoo.

Time Warner (TWX, Fortune 500), which held talks in the past about combining its AOL unit with Yahoo, appeared with its own announcement last week to be moving to shed part of its AOL operations, not add to them. CNNMoney.com is a unit of Time Warner.

This was not the first time Microsoft has been rejected in an attempt to acquire Yahoo.

The letter that Microsoft sent to Yahoo detailing this offer referred to talks held in late 2006 and early 2007 about ways the companies could work together. But it said Yahoo rejected the idea of a merger in February 2007, saying "now is not the right time from the perspective of our shareholders to enter into discussions regarding an acquisition transaction."

Microsoft's letter to Yahoo pointed out that "a year has gone by, and the competitive situation has not improved." It pointed out that combined the two companies would be better able to compete with Google for both new search technology and a share of the growing advertising dollars tied to search.

"Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition," said Microsoft's letter. "Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers and publishers."