As expected, Yahoo has formally rejected a takeover bid from Microsoft that it regards as undervaluing the company, making the next step for the Redmond firm a clear choice between launching a hostile bid or considerably increasing its offer.

The most likely follow-up move is a higher offer to the board of $35 - $40 per share - up from the original $31 - but the attitude of Yahoo CEO Jerry Yang towards Microsoft suggests even this may be insufficient.

Yang not impressed

Speaking of the initial bid, he said: "The proposal is not in the best interests of Yahoo and our stockholders. We believe Microsoft's proposal substantially undervalues Yahoo."

Should Yang force Microsoft's hand, there are other ways for the takeover to happen. One possibility sees the Windows giant approaching individual Yahoo shareholders directly.

Shareholders united

Anticipating such a move, a group of independent Yahoo shareholders has already offered to sell out to Microsoft to avoid what it sees as an inevitable decline in value should Yahoo stay independent.

Eric Jackson, the group's leader, explained: "We have no desire to see Yahoo continue independently with the current board and management team in place. We believe that is a recipe for a $17 stock price. Therefore, we will band together as a group and agree to sell our Yahoo shares to the highest bidder."

As for Microsoft, its directors clearly agree and are set on moving forward. An official response to the Yahoo rejection states:

"The Yahoo response does not change our belief in the strategic and financial merits of our proposal. As we have said previously, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo's shareholders are provided with the opportunity to realize the value inherent in our proposal."

In other words, Mr Yang appears to have a battle on his hands - expect more news on the likely merger later in the week.