Ina is reporting over at CNET that Yahoo is going to reject Microsoft’s current offer of about $30 per share and ask Microsoft for $40 per share at the Wednesday meeting.    I’m still in the camp that says Yahoo is not in a good negotiating position to make this demand, though contrary to what better connected folks than I suggest I’m guessing Microsoft will up the offer to seal this deal next week.   I say they’ll offer $34-35 at current MS pricing.   This is more than any reasonable definition of “fair market price”, and Yahoo’s board could only reject this at their huge legal peril. 

 I’m not a fan of class action lawsuits but Yahoo can probably expect a gigantic one if they turn down MS and then Yahoo tanks again.   This would probably  be resolved quickly by a board decision to go ahead and sell. 

I’d love to be a fly on Eric Schmidt’s office wall right now as Google’s role in all this is really intriguing.   They can let the merger go and assume MicroHoo can’t be competitive with Google, they can help Yahoo with monetization in a bold way to prop up Yahoo’s stock but effectively keep their one true competitor alive, or they can just sit and wait for it all to shake out.   Most analysts seem to think Google’s in fine shape competitively regardless of their decision and I’d agree with that.   In fact Yahoo’s stubborn refusal to look for the winning Microsoft combination here may be yet another nail in their corporate coffin.    I can’t help but think this is ego-centric thinking rather than the broad, practical, and innovative thinking that built Yahoo in the first place.    

Given that YHOO was trading well under $20 last week I just can’t see how they can make a strong case to Microsoft (or shareholders) that MS needs to pay a premium of over 100% on this deal.    That said, I do think Yahoo is undervalued in the technological sense – they have much of what Google has and have much of the potential Google has, yet they are capitalized at about 1/4 Google even with the recent Google stock meltdown and Yahoo stock upswing from the MS offer.   Yahoo’s a great company. Unfortunately they have failed dramatically for many years to use this greatness to be profitable and they have failed to make the case to Wall Street.  

What is the right answer in all this?     It’s simple:

1.   Microsoft should counter the $40 request with an offer of $34 per share at Wednesday’s MS stock price.

2.   Microsoft will keep Yahoo intact largely in current form for six months.   Yang and the Yahoo board will be given SIX MONTHS to kick whatever asses need kicking to make Yahoo more profitable.   If Yahoo’s looking healthy in six months they’ll stay on this course, but if they can’t fix in six, send them to the sticks and MS will take over in heavy handed form.

3.  Reorganize the languishing publisher programs at MS and Yahoo to compete more effectively with Google Adsense, which has a virtual monopoly in this space and accounts for over 40% of Google revenue.

Disclosure:  Long on Yahoo