In a flash of defiance, Yahoo has rejected Microsoft’s hefty $44.6 billion offer for the company, testing the ground for an even bigger bid.

It appears that Microsoft may be prepared to sweeten its offer, but not by enough to satisfy the Yahoo board, which the software giant may want to retain.

From Yahoo’s point of view, a further rejection could lead to a hostile takeover battle which it may be ill prepared to fight.

Microsoft is gambling that buying Yahoo would transform both companies’ attempts to overhaul Google in search and advertising.

The unsolicited offer represents a 62pc premium over the internet company’s recent share price.

However, in a Friday counter-attack, Google’s Chief Executive Eric Schmidt called Yahoo CEO Jerry Yang to offer help to stall Microsoft’s bid.

Yahoo is believed to be looking at other ways to survive this “unsolicited bear-hug”, including the emergence of a rival bidder or a business tie-up with Google that will allow it to remain independent.

The Wall Street Journal reports, “No serious alternative bids have emerged, and antitrust experts say Google’s latitude to do even a business deal with Yahoo is minimal because of likely regulatory concerns. At Microsoft, optimism is growing that the $31-a-share offer for Yahoo that it made public Friday will go through in the absence of rival bids …”

This could be a long war of attrition.

We covered the launch of Microsoft’s Surface touch-screen computer last year.

This week at the Consumer Electronics Show, the company is demonstrating some new application prototypes for the product.

In his keynote speech, Bill Gates gave a demo of the kinds of interactive retail applications ideal for Surface multi-touch systems. Microsoft claims it “provides a clear solution to common consumer pain points,” including :

* Being overwhelmed by choices
* Not having enough information
* Can’t make it yours
* Want to share it with friends

An email sent to Mary Jo Foley by the product team said, “The application showcases the four key attributes of a surface computer including; multi-touch, object recognition, direct interaction and multi-user”.

In his keynote, Gates said, “Your desk won’t just have the computer on the desk, but in the desk, so a meeting room table as you’re collaborating, and the living room if you want to briefing up and play games with something like a Surface, or organize your photos. It will just be there, and easy to manipulate, easy to change and have multiple people connect up.”

Service Pack 3 (SP3) for Windows XP is making progress, we hear. Release Candidate 1 is now available from MSDN and also from TechNet.

Windows XP SP3 is expected around about the same time as Windows Vista Service Pack 1. However, it remains true that the installed base is overwhelmingly Windows XP.

Strange then that an XP update is not going to encourage IT organizations to migrate to Vista. Why switch when XP runs well enough and maybe much better with SP3 onboard?

“A public RC will be available at a later date,” a Microsoft spokesperson said in a statement. “Windows XP SP3 is a rollup that includes all previously released updates for Windows XP, including security updates, out-of-band releases, and hotfixes. We are targeting 1H 2008 for the release of XP SP3 RTM, though our timing will always be based on customer feedback as a first priority.”

Pity those of us us who have computers running each version of Windows.

Speaking at the Web 2.0 conference in San Francisco, Microsoft chief executive Steve Ballmer claimed that the software company will acquire 20 companies a year for the next five years, in the range of $50 million to $1 billion.

Google has also acquired many technology companies over recent years — at least 10 companies in the past year, compared with Microsoft’s four. Yahoo has also acquired four. The stage seems set for an open season on new and exciting start-ups.

Unfortunately, Microsoft made a reputation during the 1990s for negotiating with start-up outfits only to pull back and launch its own competitor. Now, it’s said, with less time on its hands to keep abreast of nimble competitors like Google, developers may believe the software giant has changed its spots and needs them more than they need Microsoft.

We shall see.

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