Yahoo's rejection on Monday of Microsoft's buyout offer sets the stage for the US software giant to up the ante or attempt a coup by ousting the Internet firm's board of directors.
Yahoo's board of directors spurned Microsoft's takeover bid, saying the US$44.6 billion offer was too low and not what was best for shareholders of the veteran Internet company.
Yahoo said it decided "after careful evaluation" that Microsoft's bid "substantially undervalues Yahoo." As a result, the board "concluded that the proposal is not in the best interests of Yahoo and our stockholders," it said.
Microsoft called the board's action "unfortunate" and urged Yahoo to reconsider its blockbuster bid to combine the two tech titans and said it offers "superior value" to Yahoo shareholders.
"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.
Microsoft, which called its bid "full and fair," could switch from wooing Yahoo's leaders to declaring war on them by making allies of shareholders in order to oust board members at annual elections in the middle of this year.
Yahoo's 10 board members are up for reelection. The deadline for board member candidate nominations is next month.
A small group of Yahoo shareholders last week filed a civil suit against the California company in a state court for not accepting a bid Microsoft made for the company early last year, when the stock price was higher.
"Based on conversations with stakeholders of both companies, we are confident that moving forward promptly to consummate a transaction is in the best interests of all parties," Microsoft said in its release.
"The Yahoo response does not change our belief in the strategic and financial merits of our proposal," it said.
Yahoo has rules in place that prevent Microsoft from being able to buy more than a 15 percent stake in the company directly from shareholders, so a board-circumventing "tender offer" is not feasible.
Reports indicate Yahoo wants at least US$40 per share and that Microsoft considers US$35 a top bid.
On Feb. 1, Microsoft unveiled what it called "a generous" offer to take over Yahoo, in an effort to merge the world's biggest software company with a major Internet player to take on search and advertising juggernaut Google.
Microsoft proposed US$31 per share, a 62 percent premium above Yahoo's closing price a day earlier.
Yahoo's share price climbed in the wake of the offer, and closed up over two percent at US$29.87 on Monday before Microsoft reiterated its offer.
Microsoft's stock price has slipped since the offer was made and dropped just over one percent to US$28.21 on Monday after news spread that the company might have to spend more to buy Yahoo.
Some analysts said the wording of the statement by Yahoo suggested the company was holding out for a better price and guarding against potential lawsuits from stockholders.
"Right now they are haggling," Silicon Valley analyst Rob Enderle said. "Yahoo is not saying no at any price. They are saying the Microsoft offer is not strong enough."
It is common for companies to rebuff initial buyout offers and hold out for sweeter deals.
Analysts at RBC Capital Markets said the rejection of the Microsoft bid signals that there is no sign of interest from competing bidders and that negotiations have entered a "counteroffer stage."