UPDATE 2-Microsoft evaluating Yahoo bid -sources

(Adds details on Yahoo's business; additional source)

By Anupreeta Das

SAN FRANCISCO, April 4 (Reuters) - Microsoft Corp (MSFT.O: Quote, Profile, Research, Stock Buzz) is evaluating its bid for Yahoo Inc (YHOO.O: Quote, Profile, Research, Stock Buzz) because the Internet company may have lost value since Microsoft made its offer, people familiar with the matter said on Friday.

The news, first reported by Reuters, sent Yahoo shares down more than 5 percent in extended trade.

The sources said Yahoo has lost some key personnel, making the company less valuable, while generous severance packages it handed out to executives and full-time employees in the case of a takeover have made it more expensive.

Yahoo's board of directors has rejected Microsoft's offer, made on Jan. 31, saying it "substantially undervalues" the company. The cash-and-stock bid initially valued Yahoo at $44.6 billion, but is currently worth about $42 billion.

Yahoo and Microsoft representatives declined to comment.

Yahoo has said it is exploring strategic alternatives, but no credible option has publicly emerged so far, narrowing its choices even as Microsoft refuses to raise its bid.

Instead, Microsoft has been repeatedly trying to engage Yahoo's board in discussions, these people said, declining to be named because they are not authorized to speak on the matter.