SAN FRANCISCO (Reuters) - Microsoft Corp is evaluating its bid for Yahoo Inc 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 January 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.
"It is up to Yahoo's board to engage in meaningful discussions with Microsoft," one person said.
In the meantime, the market has deteriorated and changes in Yahoo's business may have dragged down its value below what it was when Microsoft made its bid, these people said.
Roiling markets and ongoing economic woes have depressed Internet shares, with Google Inc, Yahoo's most direct competitor, down more than 16 percent since Microsoft's offer.
The sources said the overall decline in the market has inflated the premium Microsoft is offering for Yahoo.
Microsoft's bid for Yahoo is widely seen as the Redmond, Washington-based company's attempt to take on Google, which leads the U.S. search and paid advertising market.
Google's shares fell 3 percent in February on the day Web measurement firm comScore said "paid clicks" -- a key measure of how Web searchers are converted into ad viewers -- grew only modestly year-on-year.
According to comScore, Yahoo's share among the top five Web search providers dropped from 22.2 percent in January to 21.6 percent in February. These are signs, according to the sources, of deterioration in Yahoo's core businesses.
In February, Yahoo instituted "golden parachutes" for its executives and full-time employees, pumping up benefits in the event of an acquisition.
Microsoft and Yahoo executives have met at least once since the offer to discuss a potential merger, a source told Reuters earlier.
Yahoo has also held talks with News Corp and Time Warner Inc's AOL division about potential combinations, but these discussions appear to have yielded no alternatives yet.
A person familiar with Microsoft's thinking earlier told Reuters the company sees no reason to raise its bid and would not bid against itself.
Yahoo shares fell to $26.81 in extended trade after closing on Friday up 0.8 percent at $28.36 on the Nasdaq. Microsoft gained 24 cents after closing up 0.55 percent at $29.16.
Additional reporting by Daisuke Wakabayashi in Seattle; Editing by Gary Hill and Braden Reddall