updated 5/6/2008 12:49:17 PM ET 2008-05-06T16:49:17

When Yahoo Inc. holds its annual meeting July 3, expect fireworks from irate shareholders seeking retribution for the company’s decision to remain independent instead of accepting a $47.5 billion takeover offer from Microsoft Corp.

The first signs of outrage flared Monday as Yahoo’s stock plunged 15 percent in reaction to Microsoft withdrawal of its sweetened $33-per-share bid and two lawyers already suing the company’s board vowed to amend their complaint to account for a “massive loss in shareholder value.”

The breaking point in the 3-month standoff occurred over the weekend when Yahoo co-founders Jerry Yang and David Filo met with Microsoft Chief Executive Steve Ballmer after he had agreed to raise the software maker’s bid by about $5 billion, or more than $3 per share. Yang and Filo said Yahoo’s board wanted $37 per share — a price the company’s stock hasn’t reached in more than two years.

In response, Ballmer pulled his offer off the table.

(Msnbc.com is a joint venture of Microsoft and NBC Universal.)

In an interview Monday, Yang indicated he had expected Ballmer to counter.

“We engaged with them and we wanted to find a way to get something done. But they walked,” said Yang, who was named as Yahoo’s chief executive officer 11 months ago.

If he wants to remain CEO, Yang probably will have to show his turnaround strategy is compelling enough to propel Yahoo’s stock beyond $33 per share within a year.

Yang has promised that a more sophisticated and far-flung ad network will accelerate Yahoo’s net revenue growth by at least 25 percent in 2009 and 2010, up from the recent pace of 12 percent increase.

“The company is doing better than three months ago,” Yang said Monday. “I think in many ways this (takeover threat) has been good for us. We still have a lot of work to do to demonstrate that we can be successful, and I am focused on that.”

But Yang’s credibility has been undermined by Yahoo’s repeated forecasts of better times ahead while its profits steadily eroded during the past two years.

“We are not willing to give (Yahoo) the benefit of the doubt that they can make meaningful improvement over the next three years,” UBS analysts Benjamin Schachter, Heather Bellini and Abhey Lamba wrote in a joint research note.

If Yahoo stumbles, that could entice Microsoft to return with another takeover bid that would be more difficult to turn down.

Venture capitalist Todd Dagres of Spark Capital likened this approach to a crocodile’s.

“Rather than try to eat its prey while it’s warm and tough, (Microsoft is) dragging it down to the bottom of the river, sticking it under a rock and eating it later when it’s cold and soft,” he said.

Although Microsoft has publicly indicated it will focus on measures besides buying Yahoo in its effort to make its Internet division profitable, several analysts predicted the software maker will revive its offer in the summer or fall if Yahoo doesn’t snap out of its two-year funk — the weakness that exposed it to an unwanted takeover in the first place.

“Should the frustration of (Yahoo) shareholders come to a boil, we believe (Microsoft) could re-enter the picture, essentially playing the role of the white knight,” analyst David Hilal of Friedman, Billings, Ramsey & Co. wrote in a Monday research note.

With similar opinions reverberating through the stock market, Yahoo’s stock didn’t sink as dramatically as many analysts anticipated. But Yahoo shares shed $4.30 to close at $24.37, wiping out nearly half the gain they had made since Microsoft made its bid Jan. 31. The drop left the Sunnyvale-based company’s market value about $12.5 billion below Microsoft’s last offer.

Yahoo’s stock price was $19.18 before Microsoft made its offer.

“I was expecting to see a more extreme reaction” to Microsoft’s withdrawn bid, Stanford Group analyst Clayton Moran said. “Microsoft is trying to make it seem like it’s not coming back (with another bid), but this somewhat muted reaction shows the market isn’t buying it.”

If Microsoft returned with a “real offer and a real proposal,” Yang said, “we would be happy to listen.”

Yang figures to get an earful from irate shareholders at the annual meeting. Yahoo finally set the meeting for July 3 after indefinitely postponing it in early spring as part of its effort to foil a possible hostile takeover attempt by Microsoft.

Now it may be Yahoo’s shareholders who try to oust Yang and the rest of Yahoo’s board instead of Ballmer, who had threatened an attempt to dump the 10 directors if they didn’t accept Microsoft’s offer.

Lawyers for two Detroit-based public pension funds that sued Yahoo in February, alleging it failed in its duty to act in shareholders’ best interests, will amend their complaint to include the weekend’s events, according to a statement Monday from the firm, Bernstein Litowitz Berger & Grossmann.

Meanwhile, Google Inc., whose dominance in online search triggered Microsoft’s bid, appears poised to grow even stronger.

Unnerved by the prospect of its two biggest rivals joining forces, Google reached out to Yahoo to help thwart Microsoft’s bid.

The collaboration has prompted Yahoo to consider turning over some of its advertising space to Internet search leader Google, whose technology yields higher profits from commercial links. If Yahoo announces an ad partnership with Google, that could preclude a renewed bid from Microsoft because Ballmer thinks the alliance will diminish Yahoo’s long-term value.

Many analysts share Ballmer’s opinion. While Google could boost Yahoo revenue by anywhere from $850 million to $1.6 billion annually, it might also hurt Yahoo by undercutting the appeal of its own ad platform.

An alliance between Google and Yahoo also would cause regulatory headaches because antitrust officials would to take a hard look at the partnership because the companies combined control more than 80 percent of the Internet’s search advertising market.

While analysts debated how Yahoo and Microsoft should proceed, most agreed Google will benefit from the aborted takeover attempt.

Even if Google doesn’t end up selling ads on Yahoo’s heavily trafficked Web site, it has kept some of the Internet’s biggest services out of Microsoft’s clutches.

“We believe Google is a major winner given the failure of the Yahoo bid,” Stifel Nicolaus analyst George Askew wrote in a Monday note. “Google is well positioned to continue to gain market share, benefit from any Yahoo (advertising) deal, and exploit any ongoing chaos at Yahoo and Microsoft.”

Google shares gained $13.61, or 2.3 percent, to close at $594.90 Monday.

Time Warner Inc. also appears to be in a better negotiating position if it decides to sell its struggling AOL subsidiary, as many analysts anticipate.

Yahoo had been mulling a possible combination with AOL’s online operations as a defensive measure against Microsoft. Now, Microsoft may make a run at AOL if it’s interest in buying Yahoo is truly dead. And if Microsoft enters the picture, Google might offer to increase its 5 percent stake in AOL just to repel Microsoft.

A long list of Internet startups also could be in line for big windfalls if Microsoft and Yahoo step up their efforts to acquire more online weapons to challenge Google. And if Microsoft and Yahoo go shopping, Google has plenty of cash to get into bidding wars for potential takeover targets like Digg Inc., LinkedIn Corp. and Facebook Inc.

“Freed of one another, Yahoo and Microsoft are buyout prospectors: we would expect a rush-to-deal environment,” BMO Capital Markets analyst Leland Westerfield.

Most analysts believe Microsoft has to make some kind of bold move after its online division lost $745 million through the first nine months of the company’s fiscal year.

“Any notion of simply returning to the original, pre-Yahoo strategy is likely to be insufficiently defined and credible,” Bernstein Research analyst Charles Di Bona wrote in a Monday note.

In a mild surprise, Microsoft shares fell 16 cents to $29.08 Monday. Most analysts thought the stock would climb because investors had driven down the shares during the last three months on worries that a Yahoo takeover would turn into an expensive mess.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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