Yahoo Rejects Microsoft Bid, Might Merge with AOL?

Yahoo’s board today officially rejected Microsoft’s $44.6 billion, $32-per-share bid to buy the company, leading to continued questions about what the company will do to revive its flagging stock price. From the release:

Yahoo! Inc. (Nasdaq:YHOO), a leading global Internet company, today said the Yahoo! Board of Directors has carefully reviewed Microsoft’s unsolicited proposal with Yahoo!’s management team and financial and legal advisors and has unanimously concluded that the proposal is not in the best interests of Yahoo! and our stockholders.

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.

Is Yahoo just negotiating, holding out for more money? It’s possible, and that’s bolstered the DealBook blog’s post of acquisition rejection letters, which posits Yahoo’s as rather friendly, noting, “Yahoo’s words seemed to lack the hard edge or the fighting spirit of some other recent brush-offs.”

But the big rumor this morning comes from The Times, which reports that Yahoo is allegedly looking at a merger with Time Warner’s AOL. If there’s any truth to the rumor, it could get tricky, because Google actually owns 5% of AOL and likely doesn’t want its competitor there. Search Engine Land notes that it would be a boon for AOL and less duplication/overlap of existing services than would exist in a Microsoft/Yahoo merger.

AOL has been spending a lot of money acquiring ad networks and Yahoo has a huge audience that they’re not monetizing as well as they could, so one very compelling part of a rumored merger would be the combination of Yahoo’s huge audience and its search capabilities with AOL’s newly formed Platform A ad network. Still, Yahoo needs to pull out some stops to either keep Microsoft out or figure out a merger with someone else, which is why many think the Microsoft acquisition is imminent, despite this first rejection.

Update: Unsurprisingly, Microsoft responded to Yahoo’s rejection today: “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.”

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