"We would prefer to do a friendly transaction," the source familiar with Microsoft's thinking told CNET News.com.
Microsoft realises retaining Yahoo's employees is an important part of the deal and is well aware of key members who would be essential to an integration of the two companies, the source said. "Efforts are being made to do just that [with respect to retention]," the source said.
Yahoo had no immediate comment in regard to any pending proxy fight with Microsoft. A spokesman for Microsoft reiterated that the company is "aware of its options".
Some Microsoft investors also support the deal, the source said. Matrix Asset Advisors, for example, said it would not only support Microsoft's existing bid but also approve of a slight increase of US$33 to US$35 a share. A number of Yahoo's 20 largest institutional investors also own Microsoft stock, with a majority of those shareholders having larger positions in the software giant's stock. Matrix, although it is not in the top 20, falls into the category of having dual ownership.
Microsoft's support comes amid a 13 percent drop in its share price since the bid was announced on 1 February. The software giant is making the move to better compete with Google in the areas of Web search, online advertising, and Web-hosted services. Yahoo is the perennial number two to Google, but would give Microsoft a huge audience.
Last week, a report published in the New York Post suggested that Yahoo's board was splintering on its assessment of the Microsoft offer.
The difficulty reportedly centered on a desire by Jerry Yang, Yahoo chief executive and co-founder, to find an alternative to selling to Microsoft, according to reports. Yang reportedly had the support of fellow directors Eric Hippeau of Softbank, an early Yahoo investor, and Robert Kotick, chief executive of Activision.
But a source familiar with Yahoo said: "Nothing could be further from the truth." This source noted that differences of opinions occasionally emerge, as they would on any board, but there is no strong division forming on the company's board.
Yahoo's board is moving as rapidly as possible in assessing its options and taking as long as needed to come to a conclusion, the source said, noting that the 14 March deadline for shareholders to file for an opposition slate will not speed up that decision making process.
Microsoft has previously indicated it is willing to take whatever means is necessary to ensure Yahoo's investors have an opportunity to consider its buyout offer. The deadline for Microsoft, or any other shareholder, to present its slate of opposition candidates to Yahoo's board of directors is 14 March.
Typically, in hostile takeover attempts, the buyer will not only launch a proxy fight to get its slate of opposition directors elected, but also announce a tender offer, proxy solicitors say.
A tender offer calls on investors of the target company, such as Yahoo investors, to agree to tender their shares to the prospective buyer. Once that buyer gets its slate of opposition directors elected, those directors would change the bylaws to remove the "poison pill"-- an antitakeover policy that makes it prohibitively expensive for hostile buyers to gain ownership in the target company above a certain threshold. Yahoo's 10 directors are up for re-election on an annual basis.
CNET News.com's Elinor Mills and Ina Fried contributed to this report.
