Microsoft Corp., faced with Yahoo! Inc.'s decision to reject the company's takeover bid, must decide whether to increase its offer or risk a hostile takeover. Insiders say that though Microsoft may raise the amount of its offering per share, it is unlikely to increase its offer to the $40 per share Yahoo! executives have indicated they think is fair. At the same time, Microsoft hopes to avoid a proxy fight to force out Yahoo!'s board, a fight that might drive employees from Yahoo! who are critical for its future success. Instead, Microsoft may opt to apply pressure through big shareholders. The support of Yahoo! founder Jerry Yang will be key to completing any deal, and Microsoft has praised him and the company he founded, and to woo him to their cause. Despite this soft approach, Microsoft has indicated that it will not give up easily. Yahoo!, for its part, is searching for ways to remain independent and has been considering outsourcing its search advertising business to Google Inc. Yahoo! executives have based their assertion that the Microsoft offer is too low on their leadership in the online display advertising market and the risk of government anti-trust reviews holding up any deal. Without another buyer though, Yahoo! may have a tough time avoiding the takeover as it represents a 62 percent increase in value for shareholders. The response of Yahoo!'s share price to the company's rejection of the Microsoft bid may indicate shareholders feelings about the proposed deal. Microsoft is in a strong financial position to raise the bid but will try to hold down its offering price.