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Microsoft made an initial bid of $44 billion for Yahoo on 1 February, which represented a 62% premium on what the company was worth on that date. Since then, Microsoft's falling share price has brought the value of the deal down to around $42 billion.

In a statement issued today, Yahoo's board says it has "carefully reviewed Microsoft's unsolicited proposal with Yahoo's management team and financial and legal advisors and has unanimously concluded that the proposal is not in the best interests of Yahoo and our stockholders."

"After careful evaluation, the board believes that Microsoft's proposal substantially undervalues Yahoo including our global brand, large worldwide

However, the statement leaves the door open for an improved bid. "The board of directors is continually evaluating all of its strategic options in the context of the rapidly evolving industry environment and we remain committed to pursuing initiatives that maximise value for all stockholders."

Microsoft is unlikely to be deterred by Yahoo's decision. In its original letter to the Yahoo board, Steve Ballmer said Microsoft "reserves the right to pursue all necessary steps to ensure that Yahoo's shareholders are provided with the opportunity to realise the value inherent in our proposal."

That could include a proxy contest, in which Microsoft may seek to replace Yahoo's board at its annual general meeting in June. However, an improved bid seems a more likely solution. "Are they [the Yahoo board] really serious about nothing less than $40 or is it a negotiating tactic to try to get a richer price?" asks Global Crown Capital analyst, Martin Pyykkonen. "To me it sounds like a counter-negotiation tactic. Maybe they end up settling for $35, $36 or $37 a share."