Microsoft plans to intensify its pursuit of Yahoo this week when it authorizes a proxy fight to oust Yahoo's board, meaning the 19-day old acquisition attempt will soon turn a darker shade of ugly, according to The New York Times.

The proxy fight will cost Microsoft between $20 million and $30 million, much less than having to significantly up its offer for Yahoo, The Times reported Tuesday morning, quoting anonymous sources.

The aggressive move would be consistent with Microsoft's statements hinting that it's willing to acquire Yahoo via hostile means if necessary. Yahoo's board rejected unanimously Microsoft's offer, calling it too low.

Yahoo declined to comment about The Times' article. Microsoft didn't immediately reply to requests for comment.

On 1 February, Microsoft offered to pay $31 per share for half of Yahoo's outstanding shares in cash - about $22.3 billion - and 0.9509 of a Microsoft share for the other half. Microsoft's half-cash/half-stock offer to Yahoo was valued at about $44.6 billion at the time it was made; Yahoo's share price was $19.18 at the time.

However, the bid's value has dropped to about $41 billion as the price of Microsoft's stock has fallen from $32.60 at the time the offer was made. It was trading at $28.77 on Tuesday morning. At the same time, Yahoo's stock has surged, erasing the bid's original premium. It was trading at $29.32 on Tuesday morning.

In the proxy fight, Microsoft would hire a proxy solicitor to urge Yahoo investors to kick out board directors, The Times reported, adding that all Yahoo directors are up for nomination this year.

After investing heavily in recent years in its internet business and failing to achieve its desired goals, Microsoft is now convinced that it must acquire Yahoo in order to compete against common rival Google, especially in search advertising, the largest online advertising market pie, and one that Google dominates.

As of the end of 2007's third quarter, Google had almost 25 per cent of the US internet advertising market, up from almost 21 per cent in 2006's third quarter, according to IDC. Meanwhile, Yahoo's share during this period dropped to 11.3 per cent from 12.3 per cent, while Microsoft's declined to 5.2 per cent from 5.8 per cent, according to IDC.

In search usage, Google held a commanding 62.4 per cent of queries worldwide, followed by Yahoo in a very distant second place with 12.8 per cent, according to comScore. Microsoft ranked fourth with 2.9 per cent, after Baidu (5.2 per cent).

Unquestionably, Yahoo would be a major win for Microsoft in the display ad market. In November, Yahoo ranked first in the US in display ad impressions with a 19 per cent share, while Microsoft came in third with 6.7 per cent, after News Corp.'s Fox Interactive (16.3 per cent), according to comScore. Google took seventh place with 1 per cent.

However, skeptics question whether acquiring Yahoo will yield the expected benefits, considering the complexity of integrating the two businesses, cultures and technology platforms and the fact that Yahoo has had severe internal problems that have stumped its most seasoned executives. In addition, some aren't sure that a unified Microsoft/Yahoo will have a better chance to compete against Google.

Yahoo co-founder and CEO Jerry Yang, who is also on the board of directors, has been urgently looking for and considering alternatives to a Microsoft acquisition soon after Ballmer and company made their bid.

Reports - all attributed to anonymous sources in various media outlets - have emerged in the past two weeks that Yang has held conversations with Google, AOL and News Corp., exploring various deals that would allow him to reject Microsoft's offer.

The key is that the shareholder value created by a competing deal would have to at least match the value of Microsoft's deal. Otherwise, Yahoo would make itself liable to shareholder lawsuits that alleged the board had failed to perform its fiduciary duty.

So far, as experts have analyzed the potential value to Yahoo of outsourcing its search advertising to Google, merging with AOL or selling a 20 per cent stake to News Corp. in exchange for MySpace, the consensus has been that none of those scenarios comes close to matching Microsoft's offer.