Microsoft (MSFT, $28.78, up $0.25) is reportedly willing to pay up to $32-$33 for Yahoo (YHOO, $27.79, up $0.37) in what may be its last attempt to get Yahoo’s stockholders to pressure the board to sell. Yahoo’s board wants a deal done in the “upper $30s.” The original deal was for $29 a share.

The news is obviously Microsoft’s way of letting it be known that although it is willing to pay a few dollars more per share, a hostile bid is in the wings.

There is a method to Microsoft’s madness. I believe they let it be known that they are “willing to throw in a few extra dollars” which makes it look like they are willing to go higher but not at Yahoo’s price. You know Microsoft underbid it’s first offer although it was about a 60% premium from where Yahoo’s shares were trading at the time. Yahoo is expecting a 100% buyout premium which is sometimes the norm.

Look, Microsoft basically has four options. Raise the bid, lower the bid, walk away, or go hostile. By raising the bid, it looks good for business. Lowering the bid wouldn’t look good to Yahoo’s shareholders but Microsoft would get that in essence if it did walk away. Yahoo has one option which is to take this latest offer. The pendulum has swung in Microsoft’s favor.

Yahoo has no other offers on the table. Plain and simple. If Yahoo keeps denying Microsoft (which is my gut feeling) then the stock will plummet. Then again, this hasn’t seemed like a good fit from the start. Maybe if Yahoo had said “yes” right off the bat then, maybe, I would have believed this merger would work. It still may but think about it, they have already lost three months of working together by working against each other.

The companies are about $4 apart in price. Microsoft is loaded with cash and could easily do the deal but some believe Microsoft is already over-paying for Yahoo. With this latest offer, Microsoft clearly has the edge and has had the leverage from the start to make this as smooth as possible. For some reason, Yahoo is fighting tooth-and-nail and I think its a big mistake on their part. Meanwhile, Google (GOOG, $585.00, up $10.71) is up again today.

The tension is building and a resolution is nearing. The companies are working overtime and we should get a better feeling for where this is headed by the weekend. If Yahoo doesn’t do something soon though its stock will get beat down like a rented mule.

Rick Rouse