Yahoo has responded to Microsoft's weekend threat to initiate a proxy fight with more passive-aggressive behavior.

In a letter today to Steve Ballmer, Microsoft's chief executive, the Yahoo board says it is not generally opposed to negotiating with Microsoft, it just does not like the current offer.

"We have continued to make clear that we are not opposed to a transaction with Microsoft if it is in the best interests of our stockholders," the letter says. "Our position is simply that any transaction must be at a value that fully reflects the value of Yahoo, including any strategic benefits to Microsoft, and on terms that provide certainty to our stockholders."

But the companies have not made any progress in trying to negotiate such a deal. Indeed, the two sides have met only twice since Microsoft disclosed its offer on February 1, according to reports.

Ballmer, clearly frustrated by the standoff, took the talks public again in an open letter to Yahoo directors on Saturday. In it, he urged Yahoo to talk seriously about being acquired, dismissed its stand that the bid is too low, and, ominously, threatened to reduce the offer if Microsoft is forced to initiate a proxy battle.

"During these two months of inactivity, the internet has continued to march on, while the public equity markets and overall economic conditions have weakened considerably, both in general and for other internet-focused companies in particular," Ballmer wrote. "At the same time, public indicators suggest that Yahoo's search and page-view shares have declined. Finally, you have adopted new plans at the company that have made any change of control more costly."

Later, he added: "The substantial premium reflected in our initial proposal anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal." 

Ballmer, who leaked the threat of a reduced offer last Friday, gave Yahoo's board until April 26 to open substantive talks. Although Yahoo has been actively seeking a "white knight" alternative to Microsoft—including possible tie-ups with Google, AOL, and News Corp.—so far no friendly suitor has emerged to match Microsoft's offer.

A proxy fight would be expensive, though not prohibitively so for a company as big as Microsoft. More important, a fight could cost Microsoft in talent. Many Yahoo employees have already left the company to work at Google and elsewhere, and the drain could accelerate if Microsoft has to rip out Yahoo's board.

Nevertheless, most analysts believe that Microsoft will win Yahoo—the only questions are at what cost and after how much blood has been spilled.

The Financial Times’ Lex column says that “the standoff looks like a battle over how much Yahoo’s backing is really worth to Microsoft. The answer is: probably a few dollars.”

And April 22, not April 26, will be the next key date in the battle, says Michael Arrington on TechCrunch.com. That’s when Yahoo reports quarterly earnings. “If Yahoo’s earnings are as bad as people are predicting, they’ll be looking to get this deal wrapped up before that announcement.”

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