Despite having little in the way of leverage over Microsoft (MSFT), Yahoo (YHOO) rejected the software giant's $31 per share bid, deeming it inadequate. With no clear opposing bidders at this point, most industry sources simply think Yahoo will try its best to drum up interest from other parties, or at least that perception, in order to get a little more money out of Microsoft. Since the $31 offer is half stock and half cash, it only represents about $29 right now based on a lower MSFT share price ($28).

A Microsoft deal is still most likely, perhaps at $33 or $34 if Yahoo is lucky enough to get a higher offer. All of this back and forth commotion will likely keep Microsoft's stock price under pressure. When it is all said and done, there will likely be an attractive entry point for that stock. Should Yahoo agree to a deal with them, the merger arbs will be shorting MSFT until the deal closes. But after that, Microsoft shares will look very cheap.

Even at current prices ($28), prior to a higher bid or arb selling pressure, MSFT sells for 14 times this year's earnings. For a company with double digit earnings potential going forward, that's a very reasonable price. Should it get even cheaper, more value investors will likely get involved, regardless of their opinion of a Yahoo tie-up.

Update: 8:15AM (forgot to add the disclosures)
Full Disclosure: Long shares of Yahoo at the time of writing