Bloomberg News reports that Microsoft Corp. (NASDAQ: MSFT) has threatened to start a proxy war for Yahoo! (NASDAQ: YHOO) and to drop its offer price if it does not get a response from its board. CNNMoney reports that Microsoft CEO Steve Ballmer has set a three-week deadline for a response from Yahoo! Microsoft is making noises about cutting its $44.6 billion offer for Yahoo!, arguing that the U.S. economic slowdown has hurt Yahoo!'s business.

Microsoft offered Yahoo! $31 a share on January 31st -- 62% above its price the day before -- and Yahoo! rejected the offer on February 11. Meanwhile, Yahoo! and Microsoft have lost share in the U.S. search market while Google Inc. (NASDAQ: GOOG) has gained share. Specifically, Yahoo!'s share fell from 22.2% in January to 21.6% in February while Microsoft 's dropped from 9.8% to 9.6%. Google's rose to 59.2% from 58.5% in January.

Yahoo! appears to be deluding itself that a stand-alone strategy will boost its stock price. On March 18, Yahoo! argued that its second place position in Web search, its operations in Asia, and the potential cost savings of the deal show it's worth more than Microsoft's offer. Yahoo said then that sales will climb at least 19% in each of the next two years and that growth would be higher than analysts anticipated.

The market remains unconvinced and I have little doubt that if the Microsoft deal unravels, Yahoo!'s stock price will drop back to around $19 -- where it was the day before Microsoft announced its bid. And if that happens, Yahoo!'s board will be facing a tidal wave of shareholder lawsuits.

Microsoft is trying to put the screws to Yahoo!'s board. I think that if Yahoo! had a viable alternative, there would have been a sign by now. So I think it's time for Yahoo! to accept Microsoft's offer.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.