SAN FRANCISCO -
The decision could provoke a showdown between two of the world's most prominent technology companies.
If the world's largest software maker wants Yahoo badly enough, Microsoft could try to override Yahoo's board by taking its offer - originally valued at $31 per share - directly to the shareholders.
Pursuing that risky route will probably require Microsoft to attempt to oust Yahoo's current 10-member board.
Alternatively, Microsoft could sweeten its bid.
Many analysts believe Microsoft is prepared to offer as much as $35 per share for Yahoo, which still boasts one of the Internet's largest audiences and most powerful advertising vehicles despite a prolonged slump that has hammered its stock.
Yahoo's board reached the decision after exploring a wide variety of alternatives during the past week, according to the person who spoke to the Associated Press.
The person did not want to be identified because Yahoo's reasons for rejecting the bid will not be made public until tomorrow.
Microsoft and Yahoo declined to comment yesterday on the decision, first reported by The Wall Street Journal on its website.
Yahoo's board concluded Microsoft's offer is inadequate even though the company couldn't find any other potential bidders willing to offer a higher price.
By spurning Microsoft, Yahoo risks further alienating shareholders already upset about management missteps that have led to five consecutive quarters of declining profits.
The downturn caused Yahoo's stock price to plummet by more than 40 percent, erasing about $20 billion in shareholder wealth, in the three months leading up to Microsoft's bid.
Seizing on an opportunity to expand its clout on the Internet, Microsoft dangled a takeover offer that was 62 percent above Yahoo's stock price of just $19.18 when the bid was announced Feb. 1.
Yahoo shares ended last week at $29.20.
Led by Jerry Yang, company co-founder and board member, Yahoo will now be under intense pressure to lay out a strategy that will prevent its stock price from collapsing again.
What's more, Yang and the rest of the management team must convince Wall Street that they can boost Yahoo's market value beyond Microsoft's offer.
Yahoo's shares traded at $31 as recently as November, but have eroded steadily amid concerns about the slowing economy and frustration with the slow pace of a turnaround that Yang promised last June when he replaced former movie studio mogul Terry Semel as Yahoo's chief executive officer.
This isn't the first time that Yahoo has spurned Microsoft. The Redmond, Wash.-based company offered $40 per share to buy Yahoo a year ago only to be shooed away by Semel, according to a person familiar with the matter. The person didn't want to be identified because that bid was never made public.
Yahoo now may want Microsoft to raise its price to at least $40 per share again. That would force Microsoft to raise its current offer by about $12 billion, a high price that might alarm its own shareholders.
Microsoft's stock price already has slid 12 percent since the company announced its Yahoo bid, reflecting concerns about the deal bogging down amid potential management distractions, sagging employee morale, and other headaches that frequently arise when two big companies are combined.
Although it isn't involved directly in the deal, Internet search leader Google Inc. looms as a major player. Yahoo has struggled largely because it hasn't been able to target online ads as effectively as Google.
Microsoft believes that Yahoo's brand, engineers, audience, and services will provide the company with valuable weapons in its so far unsuccessful attempt to narrow Google's huge lead in the lucrative Internet search and advertising markets.
As it examined ways to thwart Microsoft, Yahoo considered an advertising partnership with Google - an alliance long favored by analysts who believe it would boost the profits of both companies.
It was unclear yesterday if Yahoo's plans for boosting its stock price include a Google partnership, which would probably face antitrust issues.
A Microsoft takeover of Yahoo would also be scrutinized by antitrust regulators in the United States and Europe. The antitrust uncertainties could be cited as one of the reasons that Yahoo's board decided to spurn Microsoft.