Yahoo officially says no to Microsoft; It could get ugly

Yahoo on Monday made its rejection of Microsoft's $44.6 billion bid official, concluding that the software giant's offer "is not in the best interests of Yahoo! and our stockholders" and "substantially undervalues" the company.

According to Yahoo's statement:

"After careful evaluation, the Board believes that Microsoft's proposal substantially undervalues Yahoo! 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. The Board of Directors is continually evaluating all of its strategic options in the context of the rapidly evolving industry environment and we remain committed to pursuing initiatives that maximize value for all stockholders."

Translation: Yahoo is receptive to another offer should Microsoft want to increase the price.

Update: Microsoft has responded. In a nutshell Microsoft said it may go right to shareholders. News that Yahoo would formally reject Microsoft's offer leaked out over the weekend and since the whole guessing game around this chess match has reached almost comical proportions. Yahoo is allegedly looking at outsourcing search to Google and even flirting with AOL.

At this point all of the conjecture about whether Microsoft's bid for Yahoo could work, whether the integration makes sense and even whether the software giant should break up is moot.

The one near certainty is that this Microsoft-Yahoo end game could get ugly--in a hurry. For all of Yahoo's talk about being undervalued Microsoft could really go hostile and approach shareholders individually. If this deal ever got to a shareholder vote Yahoo could become a subsidiary of Microsoft. If you are are suffering Yahoo shareholder you are underwater--and Microsoft is throwing you a life vest.

Simply put, Microsoft may just try an end run around Yahoo's board and its employees. After all, shareholders ultimately own the company. Why could this happen? Microsoft CFO Christopher Liddell hails from International Paper--an industry that doesn't have any problems with acquisitions. In the tech sector--outside of Oracle and Larry Ellison--there's this belief that you can't just take a company over without it being a friendly bid. News flash: Technology is like any other industry.

The New York Times has an interesting take on Liddell, who I pointed out as a key player before. Liddell's fingerprints are already on Microsoft's bid--the company mentioned that it may take debt to fund a Yahoo purchase. Liddell is familiar with using the balance sheet for leverage. Can you imagine having Microsoft's balance sheet for ammo? Here are some choice excerpts from the New York Times story:

• “You have to be disciplined and ruthless,” Mr. Liddell said by telephone last week, before Yahoo’s board decided to rebuff the offer. “We should see acquisitions as a way of growth. We should not be embarrassed at all.”
• More an accountant than a technologist, Mr. Liddell, who joined Microsoft after serving as chief financial officer at International Paper, the giant forest products company, clearly has no compunction about ruffling any digital feathers. Among his alternatives is a series of bare-knuckle Wall Street tactics: First, Microsoft is planning to crisscross the nation to meet with Yahoo’s largest shareholders in an election-style campaign, hoping they can put pressure on Yahoo’s board, people briefed on the company’s plans said.
• Microsoft could also decide to make an offer directly to shareholders, called a tender offer, which would put more pressure on Yahoo’s board to negotiate. At the same time, Microsoft could also set a deadline for its bid, known as an “exploding offer.” And if Microsoft decides to make this a nasty battle, it could start a proxy contest to oust Yahoo’s board at its next election; it would have until March 13 to nominate a new slate of directors.

Add it up and we're going to get an interesting game of chicken. Microsoft could get really hostile. Yahoo is in a race against the clock to come up with something better. And shareholders and employees are pawns.