Last Updated: April 7, 2008: 11:52 AM EDT
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Yahoo hopes for a higher price

Yahoo takes a slightly warmer tone to a deal after Microsoft's threat, but the Net search giant is still holding out for more money.

By Scott Moritz, writer

NEW YORK (Fortune) -- For the second time in two months, Yahoo has rejected Microsoft's $42 billion offer. But in a rejection letter sent to Microsoft chief Steve Ballmer Monday, Yahoo said it was not opposed to a deal. Yahoo effectively stood its ground on price, pointing to the strength of its business as recently presented in its three-year outlook and calling itself undervalued by Microsoft.

The letter was a response to Microsoft's letter on Saturday that said that the company was reevaluating its offer and gave Yahoo (YHOO, Fortune 500) three weeks to accept the terms or face a proxy battle.

This hard-ball approach further clarifies the positions the two companies have taken: Microsoft (MSFT, Fortune 500) wants a deal soon at its price, and Yahoo wants a handsome sum.

The standoff, now nine weeks long, strikes some observers as par for the course in recent tech deals. Oppenheimer analysts say Yahoo's unbending stance is "very reminiscent" of the approach BEA took under pressure from Oracle (ORCL, Fortune 500). The outcome will likely be the same, says Oppenheimer, Microsoft will "ultimately raise its bid to speed up the process."

Yahoo's options continue to be limited. The company is exploring other alliances, including a deal with Time Warner (TWX, Fortune 500) to take on the AOL unit in exchange for a 20% equity stake in Yahoo, according to the New York Post Monday.

The fate of the No.2 Internet shop is largely sealed as Microsoft closes in. But Yahoo can hope for a higher price if its business is strong. "We think Yahoo's only escape from Microsoft's ultimatum is to have posted a strong first quarter and raise its outlook for the rest of the year," writes Henry Blodget on Silicon Alley Insider. To top of page

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