SAN FRANCISCO -- After more than five months of sparring, the battle for control of Yahoo Inc. has turned into a bare-knuckles brawl with a whiff of desperation hanging over all the key combatants.
The showdown intensified late Saturday after Yahoo revealed that it had spurned Microsoft's latest attempt to buy its online search engine in a joint proposal made with activist investor Carl Icahn, who is leading a shareholder rebellion aimed at removing Yahoo's current board.
Icahn, who has no experience running an Internet company, would have been left in charge of Yahoo's remaining pieces had an agreement to sell the search engine to Microsoft been reached.
"It's not surprising that Yahoo would reject an offer like that," Gartner Inc. analyst Andrew Frank said Sunday. "It would be just too complicated to do."
Microsoft declined comment Sunday. Icahn didn't respond to requests for comment.
Yahoo's explanation for rebuffing Microsoft left little doubt that both Yahoo and Icahn are now willing to explore options that they had previously scorned as they appeal to Yahoo shareholders before a pivotal Aug. 1 vote.
The shareholders are being asked to either support the current Yahoo regime that has overseen the Internet icon's recent struggles or roll the dice on an alternate board led by Icahn in hopes of finally working out a deal with Microsoft.
Hoping to fend off the revolt, Yahoo's board is now willing to sell the entire company to Microsoft for $47.5 billion, or $33 per share -- a price it rejected as too low 10 weeks ago. But Microsoft has said it has no interest in buying Yahoo in its entirety as long as the company's current board is in place.
Yahoo evidently has concluded it miscalculated by demanding $37 per share in early May, prompting Microsoft to withdraw its bid to the dismay of Yahoo shareholders as they helplessly watched the company's stock price sink back toward $20.
As for Icahn, he is now pushing Yahoo to sell its search operations to Microsoft -- an idea that he implored the company's board not to pursue just last month.
Icahn hasn't publicly explained the reasons for his change of heart, but it might have to do with the significant losses he may suffer on his 5 percent stake in Yahoo if he can't find a way to drive the company's stock price above $25.
Yahoo shares finished Friday at $23.57, after rising 10 percent last week on hopes that Microsoft's decision to side with Icahn might pave the way for a deal.
Microsoft's latest run at Yahoo indicates that the world's largest software company still believes it needs its rival's search engine to counter the intensifying threat posed by Google Inc.'s dominance of the Internet advertising market.
But with its own stock price down by 29 percent so far this year, Microsoft appears less inclined to spend the more than $40 billion that it would take to buy all of Yahoo.
As an alternative, the Redmond, Wash.-based company is trying to pry loose just Yahoo's search engine for substantially less money. Microsoft had previously offered to buy Yahoo's search engine for $1 billion and invest $8 billion for a 16 percent stake in what was left of the company.
Specifics of the latest offer haven't been publicly spelled out, although Yahoo said it included "a number of improvements."
Yahoo has steadfastly refused to part just with its search engine, maintaining that selling such an integral part of its business would cripple its ability to compete in the Internet's steadily growing ad market.
Yahoo instead is embracing a partnership with Google that will allow its rival to sell some of the ads displayed alongside the search results on its Web site.
The alliance, involving two companies that control more than 80 percent of the U.S. search advertising market, is expected to face a rigorous antitrust review. Lawmakers have scheduling a hearing Tuesday to review the competitive fallout from the proposed partnership.
By using Google's superior technology, Yahoo estimates it can boost its annual revenue by about $800 million and accelerate a turnaround plan that has been drawn up during the past year by Yahoo Chief Executive Jerry Yang, who co-founded the company 14 years ago.
Yahoo is expected to update analysts and investors on its progress July 22 when it releases its second-quarter earnings results. The pressure on Yang and the rest of Yahoo's board will intensify if Yahoo's profit and revenue disappoint Wall Street.
If he wins the shareholder vote, Icahn already has vowed to fire Yang as CEO and replace him with a more seasoned executive. That has led to some speculation that Yang might resign before the annual meeting to placate shareholders, but publicly he has signaled his intention to stay on the job.
Icahn hasn't identified who he has in mind to run Yahoo, but some analysts believe he will spell that out when he files his definitive proxy statement -- the paperwork that is supposed to be mailed out to voting shareholders. Icahn is expected to make that filing soon.
With just a few weeks of campaigning before Yahoo's annual meeting, it looks like the gloves are coming off.
Microsoft and Icahn apparently presented its latest bid in a surly manner, framing it as a "take it or leave it" proposal that gave Yahoo's board just 24 hours to respond, according to Yahoo.
In a testy response that could further escalate the tensions, Yahoo Chairman Roy Bostock branded Microsoft's hard-nosed tactics as "ludicrous" and chastised the software maker for its "completely absurd and irresponsible" refusal to negotiate with Yahoo's current board.
Frank, the analyst, expects even more acrimony and surprising twists before Yahoo's shareholders meeting.
"The public statements from everyone are tracking so poorly to what they have subsequently done that it's awfully hard to predict what will happen next," he said.