Yahoo Inc spurned Microsoft Corp's US$44.6 billion takeover bid as inadequate yesterday, betting that it can elicit a higher offer from the world's largest software maker or find another way to deliver a comparable payoff to its shareholders.

The rebuff by the slumping Internet pioneer had been widely anticipated after word of Yahoo's intention was leaked during the weekend.

In its formal response, Yahoo said its board had concluded Microsoft's unsolicited offer "substantially undervalues" the Sunnyvale-based company.

Investors appeared confident that Microsoft wants Yahoo badly enough to raise the stakes.

If Microsoft doesn't raise its offer, Yahoo Chief Executive Jerry Yang assured employees in an email yesterday that the company is poised to rebound on its own and become a 'must buy' in the US$45 billion online advertising market.

Falling stock price

Just two days before Microsoft made its bid, Yang had warned Yahoo faced "headwinds" that made it unlikely that the company's performance would improve significantly until 2009.

Yahoo's stock price had dropped by more than 40 per cent in the three months leading to Microsoft's bid, valued at US$31 per share when it was announced February 1.

The offer was 62 per cent above Yahoo's market value at the time.

Many analysts believe Redmond, Washington-based Microsoft, will eventually raise its bid to US$35 to US$40 per share, sweetening the pot by US$5 billion to US$12 billion in an effort to negotiate an amicable sale.

Microsoft was prepared to pay at least US$40 per share for Yahoo a year ago, according to a person familiar with the talks between the two companies at that time.

By rejecting Microsoft's initial offer, Yahoo's board is running the risk that the company's stock will plunge below US$20 per share again if its suitor decides to walk away.

- AP