Yahoo Inc.'s board reportedly held a special meeting Friday to discuss how to handle the slumping Internet pioneer's first response to Microsoft Corp.'s week-old takeover bid, setting the stage for either a quick resolution or months of acrimonious wrangling.
After fruitlessly searching for other suitors, Yahoo's options appear to have boiled down to a tough choice.
In the most likely outcome foreseen by industry analysts, Yahoo will either begin negotiating the final terms of an amicable sale to Microsoft or undergo a painful reorganization that would include relinquishing control of its search engine and a big piece of its advertising to rival Google Inc.
If it's rebuffed, Microsoft has indicated it may try to override Yahoo's board and take its offer directly to the company's shareholders in a battle that could drag on through the spring.
Microsoft still has time to weigh its options because the deadline for nominating a different slate of Yahoo directors — a key weapon in hostile takeover attempts — isn't until March 13.
Yahoo declined to confirm the Friday board meeting, which was first reported by TechCrunch, an influential blog that broke the news of Google Inc.'s acquisition of online video pioneer YouTube in 2006.
Another well-regarded blog, BoomTown, reported Friday's board meeting occurred on a phone conference and that all 10 directors would convene Feb. 13 for an all-day meeting at Yahoo's Sunnyvale headquarters. BoomTown didn't identify its sources.
"As a matter of policy, we don't comment on when the board meets," a Yahoo spokesman said, reiterating the company's previous promise to pursue a course that will "maximize long-term value for shareholders."
As of late Friday, Yahoo hadn't issued any additional statements about the Microsoft offer.
Microsoft hasn't set a timetable for Yahoo to respond to its offer, valued at $44.6 billion, or $31 per share, when it was announced a week ago.
The bid was 62 percent above Yahoo's sagging stock at the time, making it difficult for Yahoo's board to reject unless the company can devise a plan compelling enough to produce a similar lift to its market value.
Yahoo's alternatives include lining up competing offers, but some of the most logical bidders — a list including AT&T Inc., News Corp. and Comcast Corp. — decided to stay on the sidelines. A leveraged buyout loomed as another possibility, but the credit crunch appears to have closed that route.
Most analysts believe Yahoo ultimately will fall into Microsoft's clutches, although the board will likely try to extract a higher offer.
Yahoo may be especially reluctant to accept the initial bid because Microsoft offered $40 per share just a year ago, according to a person familiar with the earlier discussions between the two companies. The person asked not to be identified because the bid was never made public.
Terry Semel, then Yahoo's chief executive officer, spurned Microsoft because he believed the company was about to start making more money from a new formula for delivering text-based ads to search requests.
Although the overhaul has produced more ad commissions, the improvement hasn't been enough to offset other weaknesses that have caused Yahoo's profits to fall for five consecutive quarters.
Yahoo co-founder Jerry Yang replaced Semel as CEO eight months ago, but so far hasn't been able to deliver on his repeated promises of a turnaround.
Analysts estimate Microsoft could raise its Yahoo offer to as much as $35 per share.
Yahoo shares gained 16 cents to close at $29.20 Friday while Microsoft shares gained 44 cents to close at $28.56.
If it resists Microsoft, Yahoo might have to embrace an idea that analysts have been promoting for months — an advertising alliance with Google, the Internet search leader.
Under this scenario, Yahoo would have to swallow its pride and acknowledge that it will never be as successful in the lucrative field of online search advertising as its once-smaller rival.
If it joins the thousands of other Web sites that depend on Google for search advertising, Yahoo would likely be able to boost its profit by hundreds of millions of dollars annually. But the partnership might face antitrust problems because Yahoo currently runs the second-largest search advertising system behind Google, raising the prospect of reduced competition unfairly driving up prices.
Similarly, a Microsoft-Yahoo combination will face antitrust hurdles.
If Google takes control of its search business, Yahoo would no longer need several thousand workers and probably would fire them to help boost the company's stock. The Google-induced layoffs would likely be made in addition to the 1,000 job cuts that Yahoo announced just before Microsoft made its bid.
Jettisoning so many workers figures to be difficult for Yang, who fought back tears when Yahoo laid off 650 workers in 2001 amid the ruins of the dot-com bust.
Microsoft also plans to cut jobs from Yahoo's 14,300-employee payroll, although its executives haven't specified how many people would be let go. A person familiar with Microsoft's plans said the company believes many of the Yahoo workers whose jobs are eliminated after a takeover would be offered new assignments in the combined company.
"One of the reasons Microsoft wants Yahoo is because of all the talented people there," said the person, who didn't want to be identified because of the sensitivity of the matter.