Here's the letter from Steve Ballmer to Yahoo's board of directors:

We believe now is the time for our respective companies to authorize teams to sit down and negotiate a definitive agreement on a combination of our companies that will deliver superior value to our respective shareholders, creating a more efficient and competitive company that will provide greater value and service to our customers. If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo! board. 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.

We have all been wondering about the radio silence surrounding Yahoo's headquarters, and though we now know that Microsoft and Yahoo have been meeting, it appears that Yahoo lacks the appropriate sense of urgency.

But would Microsoft really lower its offer if required to go hostile? That might be hard to imagine, given the substantial resistance among some of Yahoo's shareholders to the original offer, but as I noted early on, many of Yahoo's current shareholders have purchased those shares lately in search of a premium. And they are unlikely to be too picky about the size of the premium at this point, because even a modest premium is better than Microsoft walking away. As Yahoo learned last week.

UPDATE: FT on the prospect of a lower bid:

A person close to Microsoft refused to confirm this meant the company would cut the value of its original offer but called Mr Ballmer’s letter “self-explanatory.”

The value of Microsoft’s cash-and-stock bid has already slipped from its original $31 a share as the software company’s own stock has fallen, taking it to $29.36 a share at Friday’s close. Speculation has been rife on Wall Street and in Silicon Valley that Microsoft would eventually sweeten its bid for Yahoo, at least taking it back to the original $31 and potentially lifting it higher in return for a negotiated deal.

In hostile takeover fights in the US, threats to cut the value of a bid are not unusual and are sometimes followed by eventual increases. Larry Ellison, chief executive officer of Oracle, has used the tactic in his own hostile deals, threatening to reduce his offer for BEA Systems last year and actually reducing his bid for PeopleSoft before eventually paying a higher premium for both companies.

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