Yahoo rejects Microsoft bid

By Daisuke Wakabayashi and Eric Auchard

SEATTLE/SAN FRANCISCO (Reuters) - Yahoo Inc rejected Microsoft Corp's unsolicited $41.6 billion takeover offer as too low on Monday, forcing the software maker either to sweeten the bid or adopt a hostile approach to clinch a deal.

Microsoft responded by calling its offer full and fair, but stopped short of saying it would not raise its offer. Microsoft said in a statement it reserves the right "to pursue all necessary steps" without specifying whether it plans to take its bid straight to Yahoo shareholders.

Still, analysts say Microsoft will probably raise its bid, originally valued at $31 a share, to at least $35, but could be persuaded to go as high as $40. Yahoo's statement did not suggest what price its board was seeking.

"The proposal is not in the best interests of Yahoo and our stockholders," Chief Executive Jerry Yang wrote in an e-mail to employees on Monday. "We believe Microsoft's proposal substantially undervalues Yahoo."

Microsoft wants to complete the largest-ever computer technology merger in a bold strategic move aimed at creating a formidable rival to Web search leader Google Inc.

Yahoo said the offer did not properly assess its audience of 500 million users worldwide, investments in its online advertising platform and its ability to generate cash.

The offer also does not take into account growth prospects or overseas holdings, which include a large minority stake in Yahoo Japan Corp, the company said. Yahoo said its board was evaluating all its strategic options.

Redmond, Washington-based Microsoft now must decide whether to sweeten its offer, launch a proxy fight or, the least likely option, withdraw.