Microsoft’s fight for Yahoo! is about to intensify even more. The software giant announced that it will authorize a proxy fight at the Internet company this week. Unless Yahoo! quickly reverses its course and enters into talks with Microsoft regarding the 19-day old acquisition attempt, things will likely get ugly.

If Yahoo! fails to act as requested, Microsoft will seek to nominate a slate of directors to Yahoo’s board by March 13, the final deadline for nominations, and pursue a lengthy campaign to oust the board.

The proxy fight is likely to cost Microsoft between $20 million to $30 million. While this amount is certainly not minimal, it is significantly less than the alternative to raising its $44.6 billion bid and is considered to be a less expensive way to put pressure on Yahoo’s board. 

This latest announcement is consistent with Microsoft’s statements that it would pursue all options in an attempt to lock up Yahoo! while it races to catch up to Google (News - Alert). After Yahoo! rejected Microsoft’s bid as being too low, the software giant hinted that it was willing to acquire Yahoo! through hostile means if necessary.  

Microsoft’s stock has fallen 12.8 percent since announcing the offer two weeks ago. The value of the deal has also fallen to roughly $41 billion. While Yahoo! is insisting that the deal is too low, the $31-per share offer would cost Microsoft an additional $1.4 billion for every dollar added.

Bill Gates (News - Alert) told the Associated Press on Monday, “We sent them a letter and said we think that’s a fair offer. There’s nothing that’s gone on other than us stating that we think it’s a fair offer. They should take a hard look at it.”

In the proxy fight, Microsoft will hire a proxy solicitor to urge Yahoo! investors to remove board directors, according to the New York Times. An important note, all Yahoo! directors are up for nomination this year and per section 3.3 of the by-laws, in a contested election, directors are elected by a plurality of votes cast.

While this aggressive approach has left the door open for such a move, some industry experts say that Microsoft would prefer a friendly deal – and show given the possibility of Yahoo! employees leaving en masse if a bitter takeover fight erupts.

Microsoft has been running into walls in its attempt to succeed in the Internet business and is now convinced that it must acquire Yahoo! in order to compete against common rival Google in search advertising, the online advertising market and the market that Google dominates.

Yahoo co-founder and CEO Jerry Yang (News - Alert), who is also on the board of directors, has been urgently looking for and considering alternatives to a Microsoft acquisition. Anonymous sources revealed that Yang has held conversations with Google, AOL and News Corp., exploring various deals that would allow him to reject Microsoft's offer.