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Microsoft waiting for formal rejection from Yahoo

Wondering why Redmond hasn't upped its bid for Yahoo yet? The software giant may be waiting for a "Dear John" letter.

If Microsoft is serious about its bid for Yahoo, why haven't we heard more from the software giant?

Having been informally rejected by Yahoo, the software maker is awaiting a formal rejection before going ahead with its next move, likely appointing its own slate of directors, a move that it has until March 14 to make.

While Microsoft could just raise its bid, one source says the company doesn't see a benefit in bidding against itself until Yahoo shows its willingness to come to the bargaining table. According to The New York Times' DealBook, Microsoft is ready to approve going forward with a proxy battle.

Such a formality may seem surprising, given Yahoo has publicly stated that Microsoft's unsolicited buyout bid first valued at $44.6 billion, or $31 a share, undervalued the company. But a formal step likely is needed to put the ball back into Microsoft's court.

"Yahoo has been radio silent since the offer was made," said a source familiar with Microsoft's thinking. "Until Yahoo is prepared to respond, I don't know why (Microsoft) would want to raise the bid. It would be like bidding against ourselves."

But one source familiar with Yahoo's thinking and the "radio silence" noted: "Sometimes in negotiations, you have to bid against yourself."

Basically, the software giant is waiting for a formal rejection letter from Yahoo, which would include typical "Dear John" merger language like: We reject your offer and think we are worth a lot more than what you are offering. Come sign a nondisclosure agreement and we will show you why we are worth a lot more.

"Yahoo needs to show a willingness to engage and have a conversation and, in less than 24 hours, we would be available to respond," the source familiar with Microsoft's thinking told CNET

However, "Yahoo may not want to engage until it's pretty certain it has explored all its other options," said one investment banker who is not involved in the transaction.

The banker surmised that Yahoo may try to argue two points on its lack of a formal response. One is that without having formally rejected Microsoft's offer, it can avoid potential shareholder lawsuits for failing to do the deal. And should Microsoft launch a hostile proxy fight or tender offer, Yahoo may try to go to the Delaware Chancery Court (where it is incorporated) with the claim such actions should be delayed, because it is still considering all its options and that is why it has not formally responded to the software giant.

An attorney who declined to be named was not aware of any similar situations in which a target company did not issue a formal response to an unsolicited bid. And the attorney could not offer any strategic advantages on why such action would be taken to forgo a formal response.

"Maybe Yahoo concluded a letter wouldn't matter and, at this point, 19 days since Microsoft made its offer, it would be hard for them to come back and say, 'by the way, your deal undervalues us,'" the attorney said.

A Yahoo spokeswoman referred questions regarding a formal rejection letter back to its public statement that it issued on February 11. A Microsoft spokesman declined to comment.

Meanwhile, a report surfaced Tuesday that Microsoft is planning to authorize a proxy fight later this week.

"We would prefer to do a friendly transaction," the source familiar with Microsoft's thinking told CNET

Microsoft realizes retaining Yahoo's employees is an important part of the deal and is well aware of key members who would be essential to an integration of the two companies, the source said.

"Efforts are being made to do just that (with respect to retention)," the source said.

Yahoo had no immediate comment in regard to any pending proxy fight with Microsoft. A spokesman for Microsoft reiterated that the company is "aware of its options."

Some Microsoft investors also support the deal, the source said. Matrix Asset Advisors, for example, said it would not only support Microsoft's existing bid but also approve of a slight increase of $33 to $35 a share. A number of Yahoo's 20 largest institutional investors also own Microsoft stock, with a majority of those shareholders having larger positions in the software giant's stock. Matrix, although it is not in the top 20, falls into the category of having dual ownership.

Microsoft's support comes amid a 13 percent drop in its share price since the bid was announced on February 1. The software giant is making the move to better compete with Google in the areas of Web search, online advertising, and Web-hosted services. Yahoo is the perennial No. 2 to Google, but would give Microsoft a huge audience.

Last week, a report published in the New York Post suggested that Yahoo's board was splintering on its assessment of the Microsoft offer.

The difficulty reportedly centered on a desire by Jerry Yang, Yahoo chief executive and co-founder, to find an alternative to selling to Microsoft, according to reports. Yang reportedly had the support of fellow directors Eric Hippeau of Softbank, an early Yahoo investor, and Robert Kotick, chief executive of Activision.

But a source familiar with Yahoo said: "Nothing could be further from the truth." This source noted that differences of opinions occasionally emerge, as they would on any board, but there is no strong division forming on the company's board.

Yahoo's board is moving as rapidly as possible in assessing its options and taking as long as needed to come to a conclusion, the source said, noting that the March 14 deadline for shareholders to file for an opposition slate will not speed up that decision-making process.

Microsoft has previously indicated it is willing to take whatever means is necessary to ensure Yahoo's investors have an opportunity to consider its buyout offer. The deadline for Microsoft, or any other shareholder, to present its slate of opposition candidates to Yahoo's board of directors is March 14.

Typically, in hostile takeover attempts, the buyer will not only launch a proxy fight to get its slate of opposition directors elected, but also announce a tender offer, proxy solicitors say.

A tender offer calls on investors of the target company, such as Yahoo investors, to agree to tender their shares to the prospective buyer. Once that buyer gets its slate of opposition directors elected, those directors would change the bylaws to remove the "poison pill"--an antitakeover policy that makes it prohibitively expensive for hostile buyers to gain ownership in the target company above a certain threshold. Yahoo's 10 directors are up for re-election on an annual basis.

CNET's Elinor Mills and Ina Fried contributed to this report.