"After careful evaluation," Yahoo! said in a statement, "the board believes that Microsoft's proposal substantially undervalues Yahoo!, including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments."
The company said it would continue to evaluate all possible options.
Microsoft described Yahoo!'s formal rejection as "unfortunate" and said its proposal was "full and fair." The company indicated that it is prepared to go the distance in an acquisition struggle and would consider "all necessary steps" to close the deal.
Microsoft's statements suggest that it will not raise its buyout price any time soon.
Experts said Microsoft could take the offer directly to shareholders, proposing a "tender offer," which could spark a proxy fight to oust Yahoo!'s current directors. Microsoft would have until March 13 to nominate a new slate of directors.
Microsoft said the Yahoo! shareholders it polled view the deal favorably, The New York Times reported.
"Based on conversations with stakeholders of both companies, we are confident that moving forward promptly to consummate a transaction is in the best interests of all parties," Microsoft said. "Yahoo!'s shareholders are entitled to have the opportunity to realize the value inherent in our proposal."
However, one Yahoo! shareholder said the statements of Microsoft and Yahoo! represent the early stages of an expected negotiation.
"I think Microsoft has made it pretty clear that they are not about to back off here," Ryan Jacob, portfolio manager for the Jacob Internet Fund, which counts Yahoo! among its top holdings, told The New York Times.
Jacob has a fund of close to $60 million in assets and favors an amalgamation of Yahoo! and Microsoft, saying "it would create a stronger competitor to Google." He also has defended Yahoo!'s initial rejection, saying the board was right to hold out for a higher offer.
Christopher P. Liddell, a two-year Microsoft executive and former banker, is slotted to orchestrate Microsoft's attempt to take over Yahoo!, as well as its first unsolicited bid.
"You have to be disciplined and ruthless," he told The New York Times last week, prior to the bid's rejection. "We should see acquisitions as a way of growth. We should not be embarrassed at all."
Liddell reportedly spent this past weekend formulating ways for Microsoft to turn up the heat in its struggle to acquire Yahoo!.