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As reported by Reuters yesterday, a prominent Microsoft shareholder is urging the company to refrain from boosting its bid for Yahoo. I tracked down a copy of the Feb. 12 letter to Microsoft CFO Chris Liddell from the shareholder, Robert Olstein, whose Olstein Capital Management owns about 1 million Microsoft shares. Here's an extended excerpt:

The only concession that you can offer Yahoo at the present time is an all cash offer. We calculate the dilution to Microsoft shareholders from an all cash deal (assuming no synergies and Yahoo & Microsoft public earnings estimates are correct) is approximately $0.07 a share. On the other hand, an all stock deal would dilute MSFT to the tune of $0.19 a share. The reason we prefer an all cash deal in the current interest rate environment is that the dilution to MSFT's shareholders would be less and MSFT's future free cash flow could pay off the debt rapidly.

Under no circumstances should you raise your price. We believe your recent offer for Yahoo is materially above Yahoo's value as an independent company. Let's not forget, your announcement to acquire Yahoo has already transferred shareholder value from Microsoft to Yahoo. Yahoo was selling at $19.00 a share and Microsoft was selling at $33.00 a share before the offer.

We believe as a stand-alone company, it would be extremely difficult to justify a $25.00 a share valuation for Yahoo and the market registered that verdict prior to your offer. I can understand MSFT's desire to consolidate with Yahoo but the message has to be clear that you have offered a price that already dilutes MSFT's shareholders. Your offer of one year ago was supposedly in the 40's. Today you are bidding in the low 30's. I believe you can buy at the present price or cheaper if you step away and play hard ball.

Yahoo, of course, presented a much different view yesterday in a letter to its own shareholders in which it explained its board's decision to turn down Microsoft's offer. The company's summary:

"(Yahoo!'s) assets -- our brand and its audience, our relationships with marketers, our financial strength, our technology, and our strategic investments--are the core of our value and our leadership position in the industry.

"We have a huge market opportunity -- and are uniquely positioned to capitalize on it. The global online advertising market is projected to grow from $45 billion in 2007 to $75 billion in 2010. And we are moving quickly to take advantage of what we see as a unique window of time in the growth -- and evolution -- of this market to build market share and to create value for stockholders.

"Today, Yahoo! is a faster-moving, better-organized, more nimble company than it was just a few months ago. We have redeployed our resources to drive Yahoo!'s key strategic priorities -- taking important steps to streamline our organization and close down or scale back businesses that don't support these critical growth initiatives. We are well on our way to transforming the experiences of Yahoo!'s users, advertisers, publishers and developers -- an important shift that is at the heart of our plan to create stockholder value."