Yahoo! Inc. (NDAQ: YHOO) officially rejected last week’s bid by Microsoft Corporation (NDAQ: MSFT) saying that it substantially undervalued the company. The search giant announced that it was continually evaluating all of its strategic options in the context of the rapidly evolving industry environment and remains committed to pursuing initiatives that maximize value for all shareholders. Many analysts believe that Yahoo pegs its true value at around $40 per share, which is substantially higher than Microsoft’s offer but much lower than its share price has been for some time. So, what’s next in this saga?

Yahoo directors are reportedly exploring many options. The first is to attempt to get a higher bid out of Microsoft, which can surely afford it. While this is certainly a possibility, many are not sure just how high the software giant will be willing to go before just making its takeover hostile. Yahoo is also reportedly considering outsourcing its search to Google Inc. (NDAQ: GOOG) in order to increase its cash flow and institute a share buyback or offer its investors a cash dividend. The final option is looking elsewhere for possible suitors, which could prove to be difficult with the current credit market conditions.

Many are now saying that Yahoo may be in talks with Time Warner’s (NYSE: TWX) AOL division. The two attempted to forge a deal in the past, but were unable to agree on some key issues. Shareholders are hoping that the urgency created by the Microsoft merger will now spur them into new talks. Many believe that this offer could be substantially higher, but would likely be a stock offer as opposed to a cash offer. After all, not many have billions in cash in the bank like Microsoft - especially these days.

In the end, Microsoft is simply trying to steal Yahoo from under the table given its extremely cheap stock and poor relative valuations. Microsoft’s offer certainly came at a nice premium that will be hard to reject without more offers, but nevertheless, they are receiving a great deal. Meanwhile, directors at Yahoo are exploring their other options to get at least $12 billion more from Microsoft ($40 per share), or find another buyer who is willing to pay what they believe is a fair value for the company. Regardless, this is definitely a stock worth watching!

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