Yahoo! Rejects Microsoft; What goes up must come down

With Yahoo! rejecting Microsoft's offer, expect things to get rather interesting; Yahoo is reportedly rejecting the offer on the grounds that $31 per share is too cheap; in light of the recent run-up in the stock price (Yahoo! is currently trading at about $30, up from about $20 before the announcement), this is definitely true. Depending on how badly Microsoft wants Yahoo!, a few options are available:

• Microsoft walks away.
• Raise the bid. Microsoft said it might go up to $35, Insiders at Yahoo! claim the board won't take less than $40.
• Convince the highest shareholders to lobby the directors to accept the offer. This would be hedge funds.
• Microsoft could go directly to the shareholders and make an cash offer.
• Microsoft could overthrow the current board of directors. Elections for the board are coming this year.

Yahoo's stock is likely going to be pretty volatile until then; it is my belief that the run-up in price was those looking for Yahoo! to be bought by Microsoft held onto their shares, while other purchases were made with the assumption the deal would go through, making whatever they bought under the $31 buyout offer profitable. With the rejection of the offer, the next move is to be made by Microsoft.

Microsoft's actions have inflated Yahoo's stock price 50%, Microsoft's best move at this time is to do things other than raise the bidding price, and in fact, it might be better for them to walk away completely. A recent poll shows that an overwhelming majority say that Microsoft should raise the price; what this tells me is that shareholders of Yahoo want this deal to go through, and they want to profit from it. If Microsoft were to release a statement to the effect of "Sorry you didn't like our offer, we regretted making it, have fun beating Google on your own", I expect we'd see a reversal of those gains. One thing that shocked me about Microsoft's offer was why the purchase price was so high; Microsoft was offering 50% over Yahoo's current stock price, and the market responded in kind, pushing the price to nearly the offer price in a day; Wall Street definitely thought this merger was going to happen, and Microsoft's stock took the appropriate hits, and Yahoo made the appropriate gains.