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Yahoo! Talks Tough, For Now

Its rejection of Microsoft's merger bid opens the door for a higher payout.
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Updated from 3:38 p.m. EST




is standing firm -- against $31 a share, anyway.

While the Silicon Valley firm

has officially rejected


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bid to merge the companies at the Redmond, Wash. firm's offering price, it's still unclear whether Yahoo!'s response is tantamount to a counter-offer -- or whether any price will be good enough.

In an email to Yahoo! employees on Monday, Chief Executive Jerry Yang wrote that "Microsoft's proposal substantially undervalues Yahoo!," citing the company's global brand, worldwide audience, recent investments in advertising platforms and future growth prospects as reasons why he thinks Yahoo! is being low-balled.

At the same time, Yang sounded like a man looking to move his company forward, or at the very least boost sagging morale: "You deserve the credit for the tremendously valuable business we have built. All of us in management, as well as the members of the board, deeply appreciate and respect what you have done and continue to do in order to maintain and enhance Yahoo!'s leadership position in the online world."

Yahoo! has been following through with a number of initiatives it started before Microsoft's proposal, including the launch of Zimbra, which provides open source, next-generation e-mail, as well as Tech Ticker, a online financial news show.

But Jordan Rohan, an analyst for RBC Capital Markets, noted that Yahoo!'s response to Microsoft's bid is in stark contrast to a year ago, "when Yahoo! said it would not discuss a merger at all."

"By naming $40/share, Yahoo is essentially countering with what it believes to be a more palatable price," Rohan wrote in his latest research. RBC Capital makes a market in Yahoo! (Over the weekend, the Wall Street Journal quoted a source close to the deal negotiations saying Yahoo! was naming $40 a share as a minimum starting point).

He further pointed out that Yahoo! had spent the last week searching for a "white knight" - basically, anyone but Microsoft.

"When no 'white knight' bidder emerged, the company did the next most logical thing, which is to position itself to pry a higher price from MSFT," Rohan wrote.

Potential suitors like

News Corp

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have already said they are not interested.

Citigroup analyst Mark Mahaney said Yahoo!'s rejection of Microsoft's bid wasn't surprising.

"It's the board's job to extract maximum value, and MSFT's 62% bid premium was on a four-year-low stock," he wrote in his research. Citigroup makes a market in Yahoo!.

Later Monday, Microsoft responded to Yahoo!'s rejection in a press release, calling it "unfortunate," and saying that "we are confident that moving forward promptly to consummate a transaction is in the best interests of all parties."

The company also held up the not-so-veiled threat of a hostile bid: "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."

Trip Chowdhry, an analyst for Global Equities Research, argues that any discussion of price will ultimately be moot because he does not expect the deal to pass antitrust scrutiny.

"What is a good price? Those conversations are totally meaningless," Chowdhry says.

He adds that Yahoo! should be more focused on being compensated if the deal does not go through by the end of the year, suggesting that the company should demand a $20 billion break-up fee from Microsoft, a figure he calculated based on Yahoo!'s valuation before the Microsoft offer.

Although no one discounts the potential delays that an antitrust review would cause, few besides Chowdhry see it as a deal-breaker between Microsoft and Yahoo!. Mahaney, for instance, pegged the odds of a regulatory blockage at 10%.

Shares of Yahoo! were up 2.2%, or 66 cents, to $29.86 in afternoon trading.