Microsoft has failed in its initial bid to acquire Yahoo, after Yahoo failed to agree to the deal by Microsoft's Saturday deadline.
Now Microsoft must decide whether to pursue a hostile takeover via a proxy fight or to drop the bid and seek other acquisition alternatives.
All along, Microsoft's management had indicated strongly that they would pursue Yahoo via all available options, including the hostile route of ousting the current board by proposing its own slate of director candidates at the next Yahoo shareholders' meeting.
But Microsoft CEO Steve Ballmer and CFO Chris Liddell softened that stance in public comments last week, saying that giving up on the acquisition would also be an option.
On Sunday, Yahoo declined to comment. Microsoft responded by pointing to comments Liddell made on Thursday during Microsoft's earnings announcement.
"Unless we make progress with Yahoo towards an agreement by this weekend, we will reconsider our alternatives. We will provide updates as appropriate next week, these alternatives clearly including taking an offer to the Yahoo shareholders, or to withdraw our proposal and focus on other opportunities, both organic and inorganic," Liddell said then.
Citing anonymous sources, The Wall Street Journal reported on Sunday that Microsoft, Yahoo and their advisers have held talks in recent weeks but didn't achieve enough progress to hammer out a deal by Saturday.
The process has clearly been frustrating for Microsoft's management, who have maintained that their offer is fair and that they don't see a reason to revise it. Ballmer and his team have shown signs of getting impatient with the slow progress, not surprising considering Microsoft's urgency at boosting its underperforming internet business and competing better against Google.
Launching a proxy fight would prolong even further the acquisition process and make the fight even nastier. Even if Microsoft were to win, it would not be a good start to what would be an arduous and lengthy post-acquisition integration process.
In the meantime, Google would no doubt seek to capitalise on the internal turmoil within Microsoft and Yahoo by trying to poach clients and valuable employees.
As soon as Microsoft announced its bid for Yahoo on February 1 - valued at $44.6bn at the time - Yahoo's management began seeking and considering alternatives, while its stock began to rise from the latest pre-bid price of $19.18.
By the time Yahoo's board formally rejected the unsolicited offer on February 11, saying it undervalued the company, Yahoo's stock price had risen to $29.87, erasing the offer's premium. The next day, Microsoft hinted in a letter to Yahoo that it wouldn't shy away from attempting a hostile takeover.
Since the bid's announcement, Yahoo CEO and co-founder Jerry Yang has held conversations with various companies including Google, AOL, Disney and News Corp, exploring alternative deals that would strengthen Yahoo's business and relieve the pressure on it to be acquired.