In response to Microsoft’s (MSFT) letter with a three-week deadline to act on Microsoft’s buyout offer, Yahoo’s (YHOO) CEO, Jerry Yang, insisted that Ballmer & Company raise its offer. Yang states that his company is not against a marriage with Microsoft, but he wants a bigger dowry.

Mutual funds, the large shareholders that control swaths of Yahoo! stock are already beginning to vocalize their desire for Yahoo! to accept an offer. One such institutional shareholder, Larry Haverty of Mario Gabelli’s GAMCO Investors, who manages a fund that owns 1.2 million shares of Yahoo! and another 1.2 million shares of Microsoft had this to say:

“Yahoo’s hand looks increasingly less attractive. We will have seen the Yahoo quarter, we will see the Google quarter, and I think we will have another quarter of Yahoo! being eaten alive by Google.”

Yang & Company are doing their jobs as fiduciaries to maximize value for shareholders. At the end of the day, they really should make a deal. Ballmer’s contention that the recessionary state of the economy puts a damper on all businesses is accurate, and makes it particularly unlikely for Yahoo! to perform better than the 62% premium Microsoft offered. The long-in-the-tooth bull market is showing signs of exhaustion and I just can’t see Yahoo! stock organically rising over 62% on its own anytime soon.

There are plenty of risks remaining for potential arbitrageurs. The Justice Department will need to give its blessing to the deal and make sure there are no insurmountable antitrust implications. The European Commission, notoriously more hostile to corporate mergers, will also have to give the deal a pass. As for a potential proxy fight, arbitrageurs can be fairly certain that shareholders will vote to accept Microsoft’s bid. If it gets to that point, I think you’ll find shareholders acting more rationally than Yahoo! executives.