Microsoft is irritated. But then, who can blame them? I mean really, they drop a massive premium on Yahoo's board and now no one will even take Steve's calls. It's like being the girl with headgear the night before the prom. So what is Microsoft to do? Go hostile, of course!
If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo! board. The substantial premium reflected in our initial proposal anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal.
Then again, I'm not sure the hostile route is going to work very well. All Yahoo's board has to do is show shareholders the famous Steve Ballmer video (viewer discretion advised) and no one is likely to want to see Yahoo swallowed by this yahoo, no matter how much money is offered:
Microsoft's Letter to Yahoo [WSJ]