Today Yahoo! Inc. rejected Microsoft Corp.’s bid of $44.6 billion saying the it “substantially undervalues” Yahoo.

To Yahoo! Inc.’s co-founder, Jerry Yang, it comes down to pride and not money. Yang has made it through the dot-com bust, it’s failure in challenging EBay Inc. in the online auction business, and it’s challenge to Google in web searches.

I understand that Yang wants to keep his pride, but what about his employees.

In an e-mail to his 14,000 employees last week, Yang said Yahoo was weighing its options. Analysts including Gartner Inc.’s Andrew Frank in New York said alternatives like linking up with Google or News Corp. won’t work. Investors like Firsthand Capital Management’s Kevin Landis said Microsoft made a “fair offer.”

Yahoo’s share of the U.S. search market fell to 18 percent in December from 24 percent a year earlier, according to New York-based Nielsen Online. Yang took over as chief executive officer in June, aiming to reclaim the company’s dominance on the Internet.

Is there any way Yahoo can come back into the fight?

While Yang will have difficulty letting go, selling to Microsoft may be his best option, said former Yahoo Executive Yen Lee.

“It’s pretty hard to imagine a better exit for Yahoo than Microsoft,” said Lee, president of the travel site Kango in Palo Alto, California. “It may be more painful for him to do what is necessary to turn the company around than to sell the business.”

Read more.

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