The section of polymorph which says "the form must be no smaller than fine" replaces the section of alter self which requires you to be within a size category of your original form.
And if you're going to argue against that, then answer me this: Why would polymorph be deliberately worded so as to disadvantage casters that are size: fine? After all, they're the only ones that could become smaller than fine anyway. It seems odd to specifically restrict them...
Polymorphed hydras should probably
a) Be allowed to make full attacks after movement or a charge (very similar to pounce, which is an ex special attack, therefore allowed by polymorph)
b) Have their heads be sunderable (seems like a physical property)
c) Not regenerate heads (seems like a special quality)