What's Microsoft's next move in fight for Yahoo?

With Yahoo issuing a resounding "no" to its current buyout bid, Microsoft has one of two levers it can pull, said some analysts, investors, and proxy solicitors.

The software giant can up the ante on its initial buyout bid of $44.6 billion and hope Yahoo will bite, or try the one-two punch approach of a tender offer followed by a proxy fight for control of Yahoo's board of directors.

While analysts believe the company has a few other moves up its sleeve before it submits its best and final offer, Microsoft appears to be posturing for a fight. Some have said the company is likely willing to up its bid to at least $35 a share.

"The Yahoo response does not change our belief in the strategic and financial merits of our proposal. 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," Microsoft said in a statement Monday in response to Yahoo's rejection of its offer.

Without a competing suitor having emerged, Microsoft may continue to argue that its bid is a fair one, said Ken Allen, a software investment analyst at T. Rowe Price, a major institutional investor in Yahoo.

"Microsoft offered a large premium, and no other bidders have emerged, so Microsoft's decision to reiterate their existing proposal seems to make sense for them," Allen said. "Microsoft may have better leverage (in) taking their bid to Yahoo's shareholders, since Yahoo's board rejected the offer. It's less clear what Yahoo shareholders think of it."

Yahoo shareholders could try to intervene, similar to a situation that BEA Systems recently faced. Late last year, Oracle made an unsolicited bid for BEA, a middleware software company. But after rejecting the offer, BEA's largest investor, Carl Icahn, intervened and directly negotiated a deal with Oracle, which in the end was higher than Oracle's initial offer but less than BEA's desired striking point.

Absent of a higher bid, Microsoft is likely to deliver a one-two punch, some proxy solicitors say. Yahoo's entire 10-member board is up for re-election at the next annual shareholders meeting. The window for shareholders to nominate their own candidates opens Wednesday and runs through March 14, according to Yahoo's Securities and Exchange Commission filing.

Before the punching begins, the persistent buyer will try to woo a reluctant target with a gentle approach in the early days of the window. That window is a time when shareholders can name opposition board candidates for investors to vote on at the next annual shareholders meeting.

But as the deadline for the window draws near, all niceties get set aside. In many cases, the buyer turns hostile and initiates a one-two punch.

First, a tender offer is floated out, even if the reluctant buyer has a so-called poison pill, said one seasoned proxy solicitor, who requested anonymity.

A tender offer gives investors an assurance that a bona fide offer is on the table, even if the buyer will not take receipt of the shares, as long as the poison pill is in place, the proxy solicitor said.

So why bother?

"It's something that the (opposition board) can say they will offer, rather than say, elect my guys and they may do this," the proxy solicitor said.

Mom-and-pop investors are listening. Individual investor Eric Jackson, who holds 96 Yahoo shares, runs a Yahoo investor Web site, which is being used as a place for retail investors to log in the number of shares that they own and act as a united voice on shareholder matters.

"We have about 100 shareholders who own about 2.1 million shares," Jackson said. "We're standing up and saying we're willing to tender our shares to the highest bidder."

After the tender offer comes the proxy fight.

With the tender offer out there, the hostile buyer will then typically introduce its opposition candidates to replace the company's board seats that are up for election.

Should the opposition candidates win and they represent a majority on the board, the board can then change the bylaws and remove the poison pill.

"If they haven't done it already, they're in the process of assembling an appropriate slate (of opposition board members)," said Bruce Goldfarb, a veteran proxy solicitor. "It's fair to assume they will run for board seats, and it won't take them long to fill the slate. We're talking Microsoft here. They have resources and access to countless high-quality candidates to be a director."

Yahoo's directors are familiar with investors' wrath. Last year, Yahoo directors who served on the compensation committee had roughly 30 percent of votes withheld for their re-election--a high percentage given most directors face a 5 percent to 15 percent withhold vote under normal circumstances, proxy solicitors say.

CNET News.com's Ina Fried contributed to this report.