YAHOO is set to reject Microsoft's £22.65bn bid to buy out the internet and e-mailing giant but is expected to have to brace itself for a further attempt.
Board members are officially considering the offer, but the Wall Street Journal has claimed secretly they believe it massively undervalues the company. They have held discussions over the phone but will not meet face to face until Wednesday.
Howev
er, it is understood Yahoo plans to send a letter to Microsoft tomorrow, explaining its decision.
Microsoft wants to purchase Yahoo to give it a better chance of competing with its rival Google in the business corridors of cyberspace.
But it may need to raise its bid from the current level of about £16 a share to more than £20.
Analysts believe Yahoo's decision to turn down the first offer could be a sign that the internet company, which has seen a slump in its fortunes in recent years, is getting ready for a long battle.
Board members believe Microsoft is attempting to take advantage of a recent drop in share prices. Terry Semel, the chairman of Yahoo, quit in June after being head of the firm for six years. He was replaced by co-founder Jerry Yang, who took on the role of chief executive.
Semel, who stayed on in a non-executive role, bowed to investor pressure to step down after he led what was seen as an increasingly ineffectual campaign to keep pace with online search leader Google.
Yahoo's stock price suffered a near 30% drop during the past 18 months as the company's financial growth fell further behind Google's breakneck pace.
Yang told employees in an e-mail last week that the board of Yahoo "is thoughtfully evaluating a wide range of potential strategic alternatives in what is a complex and evolving landscape". Google is believed to have approached Yahoo about a possible tie-up to fend off Microsoft.
Google has described Microsoft's bid as "troubling" and wants regulators to scrutinise the proposed deal. It claimed the tie-up would unfairly limit the ability of consumers to freely access competitors' e-mail and instant messaging services.
However, Microsoft chief executive Steve Ballmer said that a combined Microsoft and Yahoo would better rival Google, and therefore create stronger competition in the market for online advertising.
"Google's clearly got a dominant position," he said. "They've got about 75% of paid search worldwide."
Media tycoon Rupert Murdoch, whose News Corporation has been tipped as a rival bidder for Yahoo, has already ruled out any possibility of an approach.
So far Microsoft is the only firm to have made an offer for the search engine but analysts believe Yahoo is counting on the company's reluctance to engage in a hostile takeover.
They predict that going against the wishes of Yahoo management and the board, and creating resentment among the web giant's engineers, would only make it harder to push the deal past authorities, as Yahoo officials could try to convince regulators that it is anti-competitive.
