Yahoo plans to reject Microsoft's $44.6 billion takeover bid, the Wall Street Journal reported Saturday, citing a person familiar with the situation.
The source, according to the paper, said Yahoo's board believes Microsoft's offer of $31 per share "massively undervalues" the company and does not account for the risk that a deal could be blocked by regulators. The source also said that the company is unlikely to consider any offer below $40 per share, according to the paper. Such a premium would increase the value of the takeover offer by $12 billion.
Microsoft would not comment to Fortune on the report. Yahoo did not return a call seeking comment. On Feb. 1, Microsoft (MSFT, Fortune 500) made an unsolicited $44.6 billion cash and stock bid for Yahoo (YHOO, Fortune 500). The bid represented a 62% premium over Yahoo stock price one day earlier.
A Microsoft-Yahoo combination would create a powerful number two player in the online search business, which Google commands. It would also be one of the biggest tech deals in years, on a par with Hewlett-Packard's $25 billion acquisition of Compaq in 2002.
Both Microsoft and Yahoo have fallen far behind Google in the lucrative field of Internet search. Yahoo's earnings and share of the online search market have badly trailed Google. Google reigns over 58.4% of the U.S. search market, while Yahoo has 22.9% and Microsoft's share is just 9.8%, according to comScore.
The combined forces of Microsoft and Yahoo would also make a stronger force in online display advertising - the type of targeted banner ads that Yahoo is known for.
Soon after the bid was announced, Google (GOOG, Fortune 500) issued a statement against the deal, saying in a letter that the combination would pose significant competitiveness issues. At issue: The "overwhelming share of instant messaging and web e-mail accounts."
Microsoft shares have lost 12% since Jan. 31, closing Friday at $28.56. Yahoo shares have gained 52%, to $29.20. If Yahoo does dig in its heels, the question will be whether Microsoft CEO Steve Ballmer has the stomach to pursue a hostile takeover of Yahoo, a move that would likely involve a drawn out campaign to oust the Internet pioneer's board.