Yahoo will reject Microsoft's £22bn bid and say it undervalues the company

Yahoo is set to rebuff Microsoft's £22.4bn takeover bid for the search engine today and say it "massively undervalues" the company.

Microsoft made the unsolicited bid ten days ago in order to create a formidable challenge to the dominance of Google. But the Yahoo board is expected to write to Microsoft rejecting the $31-a-share offer as an attempt "to buy the company on the cheap".

Advisers to Yahoo are understood to be touting around an offer price of nearer to $40 a share – double the share price in January – and adding around £6.2bn to the value of Microsoft's bid.

But Yahoo will have to give valid reasons to shareholders for its rejection of the offer and come up with a value creation plan above and beyond what they stand to make if the tie-up were to go ahead. Its co-founder and chief executive Jerry Yang will have to find a strategy to revive a stock that has seen its value halve in the two years preceding the offer.

With the absence of any rival bidders, analysts believe that the Yahoo board might be prepared to sell once they have negotiated a higher price. One said that Microsoft is "well aware" Yahoo does not have any other options. Global Crown Capital analyst Martin Pyykkonen said: "Are they really seriously about nothing less than $40 or is it a negotiating tactic to try to get a richer price? To me, it sounds like a counter-negotiation tactic. Maybe they end up settling for $35, $36 or $37 a share."

Last week, analysts at Citigroup predicted that a higher bid was the most likely outcome but said $40 was "very aggressive" and that Microsoft would find it difficult to justify against Yahoo's expected cash flows. Citi-group said the offer at $31 was reasonable.

Yahoo, which is based in Sunnyvale, California, has spent years trying to catch up with Google's dominance in web queries and advertising revenue – the company has reported eight quarters of profit declines and a tie-up is looking like the only way to make it competitive.

A merged Microsoft and Yahoo would control more than a quarter of the market for animated ads and display banners at the top of internet pages. Analysts say that this would give the combined company a way to challenge Google, which has not made as much progress in that area.

But Mr Yang, who replaced Terry Semel as chief executive in June, has been reluctant to give up a company he co-founded in 1995, when he was a graduate student at Stanford University. Last week, it emerged that Yahoo was examining an alliance with Google as a last-ditch attempt to avoid being gobbled up by Micro-soft. Sources said Google contacted Yahoo within hours of Micro-soft's bid approach and was hoping to scupper a combination of its two closest competitors. Google was also reaching out to other media companies to encourage them to make a counter-bid.

Yahoo, which is being advised by Goldman Sachs and Lehman Brothers, is not expecting Micro-soft to go hostile to win the bid but reports have indicated that the software giant may try to oust the Yahoo directors if they were to reject the offer.

In a letter to Yahoo's board on 1 February, Microsoft's chief executive Steve Ballmer wrote: "Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo's shareholders are provided with the opportunity to realise the value inherent in our proposal."

A spokeswoman for Yahoo said at the weekend: "Yahoo's board is carefully and thoroughly evaluating the Microsoft proposal in the context of all of the company's strategic alternatives."

According to data from US research firm ComScore, Google accounted for more than 58 per cent of internet searches in the US in December, with Yahoo on 22.9 per cent and Microsoft on just under 10 per cent.

More than 90 years of car history are coming to an end with the abolition of the paper car-tax disc
newsThis and other facts you never knew about the paper circle - completely obsolete tomorrow
people'I’d rather have Fred and Rose West quote my characters on childcare'
Kim Jong Un gives field guidance during his inspection of the Korean People's Army (KPA) Naval Unit 167
newsSouth Korean reports suggest rumours of a coup were unfounded
Arts and Entertainment
You could be in the Glastonbury crowd next summer if you follow our tips for bagging tickets this week
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Kylie performs during her Kiss Me Once tour
musicReview: 26 years on from her first single, the pop princess tries just a bit too hard at London's O2
peopleSwimmer also charged with crossing double land lines and excessive speeding
Arts and Entertainment
A new Banksy entitled 'Art Buff' has appeared in Folkestone, Kent
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Trust Accountant - Kent

NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

Law Costs

Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

Day In a Page

Isis is an hour from Baghdad, the Iraq army has little chance against it, and air strikes won't help

Isis an hour away from Baghdad -

and with no sign of Iraq army being able to make a successful counter-attack
Turner Prize 2014 is frustratingly timid

Turner Prize 2014 is frustratingly timid

The exhibition nods to rich and potentially brilliant ideas, but steps back
Last chance to see: Half the world’s animals have disappeared over the last 40 years

Last chance to see...

The Earth’s animal wildlife population has halved in 40 years
So here's why teenagers are always grumpy - and it's not what you think

Truth behind teens' grumpiness

Early school hours mess with their biological clocks
Why can no one stop hackers putting celebrities' private photos online?

Hacked photos: the third wave

Why can no one stop hackers putting celebrities' private photos online?
Royal Ballet star dubbed 'Charlize Theron in pointe shoes' takes on Manon

Homegrown ballerina is on the rise

Royal Ballet star Melissa Hamilton is about to tackle the role of Manon
Education, eduction, education? Our growing fascination with what really goes on in school

Education, education, education

TV documentaries filmed in classrooms are now a genre in their own right
It’s reasonable to negotiate with the likes of Isis, so why don’t we do it and save lives?

It’s perfectly reasonable to negotiate with villains like Isis

So why don’t we do it and save some lives?
This man just ran a marathon in under 2 hours 3 minutes. Is a 2-hour race in sight?

Is a sub-2-hour race now within sight?

Dennis Kimetto breaks marathon record
We shall not be moved, say Stratford's single parents fighting eviction

Inside the E15 'occupation'

We shall not be moved, say Stratford single parents
Air strikes alone will fail to stop Isis

Air strikes alone will fail to stop Isis

Talks between all touched by the crisis in Syria and Iraq can achieve as much as the Tornadoes, says Patrick Cockburn
Nadhim Zahawi: From a refugee on welfare to the heart of No 10

Nadhim Zahawi: From a refugee on welfare to the heart of No 10

The Tory MP speaks for the first time about the devastating effect of his father's bankruptcy
Witches: A history of misogyny

Witches: A history of misogyny

The sexist abuse that haunts modern life is nothing new: women have been 'trolled' in art for 500 years
Shona Rhimes interview: Meet the most powerful woman in US television

Meet the most powerful woman in US television

Writer and producer of shows like Grey's Anatomy, Shonda Rhimes now has her own evening of primetime TV – but she’s taking it in her stride
'Before They Pass Away': Endangered communities photographed 'like Kate Moss'

Endangered communities photographed 'like Kate Moss'

Jimmy Nelson travelled the world to photograph 35 threatened tribes in an unashamedly glamorous style