An update on the Microsoft & Yahoo merger comes today in the form of an email from a member of the Yahoo board of directors to shareholders. The email, which was published on Todd Bishop's Microsoft Blog earlier this morning, gives a good inside account of why Yahoo shareholders may have reason to believe that more money is coming down the pike from Seattle.

Here's the most compelling excerpt . . .

"As you'll see from the news release we issued today, our board of directors has reviewed microsoft's unsolicited proposal with yahoo!'s management, financial and legal advisors. after a careful evaluation, the board has unanimously concluded that the proposal is not in the best interests of yahoo! and our stockholders. of course, the board of directors is continuously evaluating all of its strategic options in the context of the rapidly evolving industry environment and we remain committed to pursuing initiatives that maximize value for stockholders.

"We believe microsoft's proposal substantially undervalues yahoo!--including our highly recognizable global brand, large worldwide audience, significant recent investments in advertising platforms, future growth prospects, our ability to generate free cash flow and our earnings potential as well as substantial unconsolidated investments (like alibaba and yahoo! japan)."

Late last night, both the The Wall Street Journal and New York Times had published news commentary on the merger talks, with The Journal stating that Yahoo "is unlikely to consider any offer below $40 per share." The Times adds that Yahoo may be considering a buyout offer from Google to stave off Microsoft.

Here's Bishop's take on the matter:

"Microsoft could treat Yahoo's rejection as a negotiating tactic, an effort to induce a larger bid. The $40-per-share reference made by the Journal's source could lead to that conclusion. Microsoft would then need to decide whether it wants to boost its offer beyond the original $31 per share, which was a 60 percent premium over Yahoo's previous closing price."

Could Microsoft decide, in the end, to back out of the deal? Bishop thinks . . . probably not.

"Microsoft could, of course, decide to throw in the towel and give up the Yahoo bid. This is unlikely, given the merit that Microsoft executives say they see in the deal, and the fact that it has persisted despite past rejections from the Yahoo board.

Expect more back and forth between Yahoo and Microsoft in coming weeks, before a deal finally gets cut.