Microsoft: hardball

This weekend, Microsoft will turn nasty.

The software leviathan is expected to push ahead with a proxy fight to oust Yahoo's board of directors, replacing them with candidates who would favour a Microsoft takeover, if the two companies do not reach a deal by Saturday.

The better Yahoo's numbers are, the better its negotiating position with Microsoft -- and many on Wall Street thought Yahoo had bought itself some wiggle room last week when it posted a better-than-expected quarterly profit. Yahoo Chief Executive Jerry Yang talked up the performance, saying the results "underscore the fact" that the company's turnaround efforts are bearing fruit.

Yet it is unlikely Yang will convince Microsoft Chief Executive Steve Ballmer to raise his $31-per-share bid. Despite the solid results, Yahoo's overall business is no different from before. If Yang manges to talk Microsoft into sweetening its bid by a few dollars per share, it should be sufficient to satisfy Yahoo's board and its large shareholders. Given the weakened stock markets and economic conditions, Yahoo executives -- who have said they are not opposed to a sale to Microsoft –- are likely to take that money and run.