Yahoo Inc on Monday rejected as too low Microsoft Corp's unsolicited $41.4 billion takeover offer, a move viewed by Wall Street as the first salvo in an effort to get the software maker to raise its bid.

Yahoo said its board unanimously concluded the proposal was not in the best interests of its shareholders. Analysts said the rebuff could lead Microsoft to increase its $31-per-share offer to as much as $40 per share.

Yahoo said the bid substantially undervalues its global brand, its audience of nearly 500 million users worldwide, and its investments in building out a robust online advertising platform.

The offer also does not take into account growth prospects or substantial holdings, which include a stake in Chinese e-commerce firm Alibaba.com, the company said. Yahoo said its board was evaluating all its strategic options.

Microsoft now must decide whether to sweeten its offer, launch a proxy fight or simply withdraw. A Microsoft spokesman declined comment.

The most likely outcome is they negotiate a higher price, said Troy Mastin, analyst at William Blair & Co. It seems Microsoft has expressed a willingness to go to $35 or $36 a share, he said.

Analysts say Microsoft will likely raise its bid to at least $35 per share but could be persuaded to go as high as $40. Yahoo's statement did not suggest what price it was seeking.

Neither party has too many other options, said Clayton Moran of Stanford Group. We expect (Microsoft) to go to $35 and it turns friendly.

Yahoo shares were up 1.6 percent to $29.68 in morning Nasdaq trading. Microsoft shares fell 2 percent to $27.97, also on Nasdaq.

A VERY PUBLIC NEGOTIATION

A merger of Microsoft and Yahoo would be the largest ever of two computer technology companies and would create a formidable rival to Internet search and advertising leader Google Inc.

Microsoft announced the half-stock, half-cash offer on February 1. At the time, the bid represented a 62 percent premium to Yahoo's stock price. The offer was originally worth $44.6 billion, but Microsoft shares have since fallen, and the deal is now worth $41.4 billion.

Yahoo co-founder and Chief Executive Jerry Yang has taken steps to try to keep the company independent, including considering an alternate tie-up with Google to handle Yahoo's search operations.

The company may also make a new approach to Time Warner Inc's AOL Internet division, the Times of London reported on Monday. Time Warner declined comment on the report.

Yahoo shareholders may not have much patience for a drawn-out battle, particularly as the company continues to lose market share to Google. Yahoo last month disappointed Wall Street with its 2008 revenue forecasts, promising to cut jobs and shore up its Web advertising with new investment.

Sanford C. Bernstein's top Internet, media and technology analysts said in a research note that there was still a chance that the Yahoo board is digging in for a fight ... and the situation will turn ugly.

Goldman, Sachs & Co, Lehman Brothers and Moelis & Co are working as financial advisers to Yahoo; Skadden, Arps, Slate, Meagher & Flom is Yahoo's legal adviser. Munger Tolles & Olson is acting as counsel to Yahoo's outside directors.

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