“They’re no guarantee that MSFT will pursue YHOO if YHOO refuses” I figured.

Had MSFT be offended by YHOO’s rejection, they could have pulled the offer, which would have pushed the stock to the low to mid 20s.  It would not have fallen below $20 because clearly there’s a floor price for what the stock market considers YHOO to be “too cheap” (and thus inducing a takeover bid).

Alas, with MSFT saying it won’t back down from its “full and fair” offer at $31, you can imagine that the stock market will drive YHOO’s stock price pretty close to $31… bear in mind while Dow Jones’ owners retained the right to refuse News Corp.’s bid, every soothsayer recognizes that MSFT will walk away with YHOO when the dust settles.  With $31 being the floor price, YHOO will trade at $31 pretty soon.

Our bet - unlike many others - is that the time value of money and the uncertainty over the final price will cause enough of an overhand over MSFT’s stock which will lead Redmond to eventually counter with a final $35.91 price or $50B offer, which will come with a veiled hint at both a hostile attempt (to replace the Board) and a direct tender offer to shareholders.

The risk there will be a kyboshing of YHOO executives… which the market has already welcomed as a much needed change.