Yahoo Inc. spurned Microsoft Corp.'s $44.6 billion takeover bid as inadequate Monday, betting that it can elicit a higher offer from the world's largest software maker or find another way to deliver a comparable payoff to its shareholders. The rebuff by the slumping Internet pioneer had been widely anticipated after word of Yahoo's intention was leaked during the weekend. In its formal response, Yahoo said its board had concluded Microsoft's unsolicited offer "substantially undervalues" the Sunnyvale-based company. Yahoo indicated it could be lured to the negotiating table if Microsoft ups the ante, without mentioning the price it has in mind. "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 maximize value for all stockholders," Yahoo said in a statement. Investors appeared confident that Microsoft wants Yahoo badly enough to raise the stakes. Yahoo shares rose 34 cents to $29.54 in Monday's morning trading while Microsoft shares fell 46 cents to $28.10. If Microsoft doesn't raise its offer, Yahoo chief executive Jerry Yang assured employees in a Monday e-mail that the company was poised to rebound on its own and become a "must buy" in the $45b. on-line advertising market. "We have accomplished a great deal in a very short time," wrote Yang, a company co-founder who promised things would get better after he became CEO eight months ago. "Yahoo is a faster-moving, better organized, more nimble company well on its way to transforming the experiences of its users, advertisers, publishers and developers." Just two days before Microsoft made its bid, Yang had warned Yahoo faced "headwinds" that made it unlikely the company's performance would improve significantly until 2009. Yahoo's stock price had dropped by more than 40 percent in the three months leading to Microsoft's bid, valued at $31 per share when it was announced February 1. The offer was 62% above Yahoo's market value at the time. Many analysts believe Redmond, Washington-based Microsoft will eventually raise its bid to $35 to $40 per share, sweetening the pot by $5b. to $12b. in an effort to negotiate an amicable sale. Microsoft was prepared to pay at least $40 per share for Yahoo a year ago, according to a person familiar with the talks between the two companies a year ago. Yahoo wasn't interested then because it was confident in its own strategy, the source said. But a higher bid now could hurt Microsoft's own stock price, which has been slipping amid concerns that a Yahoo takeover could be more trouble than its worth. Microsoft's market value has plunged by more than $40b., or 14%, since the bid was made public. RBC Capital Markets analyst Jordan Rohan predicted Yahoo's board would have little choice but to sell the company if Microsoft raises its bid to $35 or $36 per share. "Yahoo management has already exhausted the patience of its largest, longest-suffering shareholders," he wrote in a Monday note. If it doesn't want to pay more money, Microsoft could take its original bid directly to Yahoo's shareholders. Microsoft's management began preparing for that possibility last week by meeting with some of Yahoo's major shareholders to rally support for its offer. In a more extreme tactic, Microsoft could try to override Yahoo's board by trying to oust the current directors later this year - a risky maneuver that would likely create hard feelings that would make it more difficult to cobble the two businesses together if a deal were consummated. Yahoo also could fend off Microsoft by exercising an antitakeover device, known as a "poison pill," that would issue more company shares to make a buyout too expensive to pull off. Although its profits have been dwindling during the past two years, Yahoo still possesses one of the Internet's biggest audiences and most valuable franchises. Microsoft believes it can build on those assets to become a more formidable competitor to Google Inc., which now holds a commanding lead in the lucrative on-line search and advertising markets. Yahoo has reportedly been exploring an advertising partnership with Google as one way to boost its profits and remain independent. The company also has been looking for other suitors who might be interested in countering Microsoft's bid, but so far no one has stepped forward. By rejecting Microsoft's initial offer, Yahoo's board is running the risk that the company's stock will plunge below $20 per share again if its suitor decides to walk away. That scenario would probably unleash a flood of shareholder lawsuits, intensifying the pressure on Yahoo's management team to deliver on a long-awaited turnaround that has been in the works for the past 18 months.