April 5 (Bloomberg) -- Microsoft Corp. gave Yahoo! Inc. three weeks to agree on a takeover, threatening to reduce its $44.6 billion unsolicited offer and replace the Internet company's directors if they reject negotiations.

If the two can't reach an agreement in that time, Microsoft plans to propose its own board slate and take its case to Yahoo shareholders, Chief Executive Officer Steven Ballmer said in a letter to the board today. He suggested that the deal's value might decline if Microsoft takes the bid directly to investors.

His stance may force Yahoo Chief Executive Officer Jerry Yang to find another bid within a month or accept Microsoft, the world's biggest software maker, as a suitor. Combining with Yahoo would allow Microsoft to unite the second- and third-most popular search engines in the U.S., helping them to take on Google Inc., which gets more than half the Internet queries in the country.

``I think they're surprised that Yahoo's board has strung this out this long,'' Pat Becker, chief investment manager at Becker Capital Management in Portland, Oregon, said in an interview today. ``If they have to go to a proxy fight, they possibly will lower the bid to compensate themselves for the time.'' Becker manages Microsoft shares among its $2.4 billion in assets.

The offer is 62 percent more than Yahoo's closing price the day before Microsoft disclosed the bid. Making Microsoft go to Yahoo investors ``will have an undesirable impact on the value of your company from our perspective, which will be reflected in the terms of our proposal,'' Ballmer said in the letter.

Yahoo's Rejection

Yahoo rejected the $31-a-share cash-and-stock bid on Feb. 11, saying the price didn't reflect its value. Redmond, Washington-based Microsoft said it has been given no sign that Yahoo directors have authorized their executives to enter negotiations.

Tracy Schmaler, a spokeswoman for Sunnyvale, California- based Yahoo, said she couldn't immediately comment.

Yahoo fell 87 cents to $27.49 in extended trading yesterday after Reuters reported Microsoft was re-evaluating its offer. The company closed at $28.36 on the Nasdaq Stock Market. Microsoft closed at $29.16, valuing the bid at about $29.36 a share.

In the two months since Microsoft's first advances, the U.S. economy has deteriorated, affecting the business of Internet companies, Ballmer said. Yahoo and Microsoft's share of U.S. searches dropped in February from the previous month as more Web users chose Google, according to Reston, Virginia-based researcher ComScore Inc.

Yahoo's Case

On March 18, Yahoo alluded to its No. 2 position in Web search, its operations in Asia and the potential cost savings of the deal to show it's worth more than Microsoft's offer. Yahoo said then that sales will climb at least 19 percent in each of the next two years and that growth would be higher than analysts anticipated.

The same day, Sanford C. Bernstein analyst Jeffrey Lindsay in New York called Yahoo's growth predictions in the next two years ``too bullish'' given the U.S. slowdown. Federal Reserve Chairman Ben Bernanke said this week that the U.S. may be in a recession, hurt by the collapse of the subprime mortgage market.

``Public indicators suggest that Yahoo's search and page view shares have declined,'' Ballmer said. ``By any fair measure, the large premium we offered in January is even more significant today. We believe that the majority of your shareholders share this assessment, even after reviewing your public disclosures relating to your future prospects.''

Yahoo hasn't announced the date of its shareholders meeting. All 10 of its directors are up for re-election. The last meeting occurred June 12, and under Delaware law, the company must hold one every 13 months.

``It's only a question of time before Microsoft takes them over,'' Sanford C. Bernstein's Lindsay said yesterday. He expects Yahoo stock to perform in line with its peers. ``It's just unfortunate that Yahoo has dragged it out so long, because they are probably going to miss a few dollars that they could have obtained if they had negotiated immediately.''

To contact the reporter on this story: Nancy Kercheval in Washington at nkercheval@bloomberg.net; Zachary R. Mider in New York at zmider1@bloomberg.net.

Last Updated: April 5, 2008 17:32 EDT