SEATTLE, US - MICROSOFT will authorise a proxy battle for Yahoo this week to convince the Web company's shareholders to agree on a takeover deal that the Yahoo board so far has rejected, the New York Times' DealBook blog said.

Quoting people briefed on the matter, the Times website said on Tuesday that Microsoft, which has been expected to raise its cash-and-stock bid originally worth US$44.6 billion (S$63 billion), would seek to nominate a slate of directors by March 13, if Yahoo's board did not enter talks.

A Microsoft spokesman said the company had always maintained it reserves the right to exercise all options but declined to comment specifically on the DealBook report. A Yahoo spokesman declined to comment, saying it does not respond to rumour or speculation.

'Microsoft is doing the smart thing. It's giving both the carrot and the stick,' said Morningstar analyst Toan Tran. 'The carrot was the big premium on Yahoo stock and now the stick is the threat of a proxy fight.'

Proxy fights waged by corporations to facilitate a hostile acquisition are rare and represent less than 5 per cent of all proxy fights since 2001, according to data from research firm FactSet SharkWatch.

Chairman Bill Gates said on Monday that there was 'nothing new' in the Yahoo takeover process. 'We've sent our letter and we've reinforced that we consider that it's a very fair offer,' he said.

The two companies are at a stand-off in Microsoft's unsolicited bid to acquire Yahoo. Microsoft has offered to buy Yahoo for US$31 a share in cash and stock, a bid which Yahoo's board rejected, saying it undervalued the company.

Microsoft countered by saying that its offer was 'full and fair', but did not say what it planned to do next.

The deal is now worth US$41.6 billion due to the decline of value in Microsoft's stock.

The fees for paying lawyers and solicitation firms to wage a proxy fight are a fraction of what it would cost Microsoft to raise its offer. For every dollar the offer is increased, it would cost Microsoft an additional US$1.4 billion.

If Microsoft decides to launch a proxy fight, it would nominate a slate of directors to take control of Yahoo's board and support the company's proposal. The nominees would be voted on at Yahoo's annual shareholder meeting in June.

On the other hand, Microsoft risks alienating Yahoo's rank-and-file by taking a hostile tactic. Unlike manufacturing companies with fixed assets, Yahoo's main asset to Microsoft is its engineering talent.

A hostile approach by Microsoft could lead to an exodus of talent to Google or other Web rivals.

A Yahoo-Microsoft proxy fight would be the largest corporate proxy fight in the eight years FactSet SharkWatch has been tracking statistics on this, it said.

Microsoft shares fell 14 cents, or 0.5 per cent, to close at US$28.17 on the Nasdaq. The stock is down 14 per cent since the offer for Yahoo went public.

Shares of Yahoo dropped 65 cents, or 2.2 per cent, to US$29.01. The value of Microsoft's cash and stock offer currently stands at US$28.90. -- REUTERS