In completely predictable move that nonetheless is generating lots of attention, Yahoo Inc.’s (NDAQ: YHOO) largest shareholder has criticized Microsoft Corporation’s (NDAQ: MSFT) threat to wage a proxy battle and lower its offer.

Legg Mason Inc. owns around 7% of Yahoo, giving portfolio manager Bill Miller obvious incentive to try and drive the offer price up.

In a WSJ interview, Miller said, “Telling shareholders you're going to take something away from them is not a way to get their support,” in a reference to Microsoft’s threat to simply pull its bid. Of course, in reality telling shareholders that the deal will soon be off the table seems to be a very good negotiating tactic for Microsoft. Yahoo shares were trading around the $20 per share mark prior to Microsoft’s $29 per share bid, and Yahoo shares are likely to stay around $20 for a long time if the deal doesn’t happen.

Miller would understandably like Microsoft to raise its offer – what Yahoo shareholder wouldn’t? But with no viable alternatives for Yahoo, why should Microsoft bid against itself?

The very need for Miller to speak out against Microsoft’s threat proves the threat is already working: Yahoo’s largest shareholder is worried that the Microsoft deal will disappear.

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