• by Tanya Gazdik , April 7, 2008

Microsoft on Saturday gave Yahoo three weeks (until April 26) to engage in merger negotiations and reach a deal--otherwise the company will reduce its $44.6 billion unsolicited offer and unseat the company's board of directors if they reject negotiations.

If the two can't reach an agreement in that time, Microsoft plans to propose its own board slate and take its case to Yahoo shareholders, CEO Steve Ballmer said in a letter to the board. He suggested that the deal's value might decline if Microsoft takes the bid directly to investors.

"If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo board," wrote Ballmer. "The substantial premium reflected in our initial proposal anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal."

Combining with Yahoo would allow Microsoft to unite the second- and third-most-popular search engines in the U.S., helping them to take on Google, which gets more than half the Internet queries in the country.

Yahoo's board rejected a $31-a-share cash-and-stock bid on Feb. 11, saying the price didn't reflect its value. Microsoft said it has been given no sign that Yahoo directors have authorized their executives to enter negotiations. Since then, the company has explored alliances with Google, MySpace.com and Time Warner Inc.'s AOL, but no alternative to Microsoft's offer has surfaced. Ballmer acknowledged the alternative negotiations in his letter and questioned why, in the absence of another offer, Yahoo was still unwilling to negotiate with Microsoft.

"This is despite the fact that our proposal is the only alternative put forward that offers your shareholders full and fair value for their shares," wrote Ballmer, adding that the Microsoft offer has grown stronger as the overall U.S. economic climate has weakened. "We believe that the majority of your shareholders share this assessment."

At least seven shareholder groups have already brought suit against Yahoo's board, claiming that the company has breached its fiduciary duty in rejecting the bid.