In a statement, Yahoo said that its management team, along with financial and legal advisors, believe the offer doesn't reflect cash flow, earnings potential, or recent investments in its advertising platform.
Further, Yahoo said its board would continue to evaluate other "strategic options."
"We remain committed to pursuing initiatives that maximize value for all stockholders," the statement said.
Microsoft offered $31 per share on Feb. 1, which was a 62 percent premium over Yahoo's closing price the day before, and was thus characterized at the time as the proverbial "can't refuse" type. However, since then, Yahoo's stock has risen in value and was trading just above $29 on Monday morning.
At the same time, Microsoft's stock has fallen since it made the offer, closing at $28.56 on Friday, down from a close of $32.60 on the day prior to the offer. Microsoft offered to pay $31 for half of Yahoo's outstanding shares and 0.9509 of a Microsoft share for the other half.
Yahoo's executives were rumored to have been searching for a buyer other than Microsoft. However, no buyer has emerged. Yahoo's latest moves mean that Microsoft may have make a more generous offer, or pursue a hostile takeover.
Microsoft said it believes the acquisition of Yahoo would give it the engineering talent and resources to compete better with Google. While Microsoft and Yahoo have had some success with display advertising, Google's has built a fortune on contextual text ads that appear during a search and on third-party Web sites.
With the offer, Microsoft acknowledged it believes that it and Yahoo can't make a credible run at Google unless they fuse into one organization.
However, skeptics doubt that jointly Microsoft and Yahoo will generate the magic potion that allows them to break Google's stranglehold on the search engine advertising market, the largest segment of the online ad market and the source of Google's riches. Far from making progress, Microsoft and Yahoo have seen their share of search engine queries shrink, as people's preference for Google expands.
If Microsoft acquired Yahoo, it would face the perils and traps of integrating its Internet business with Yahoo, which has 14,000 employees and enough internal problems of its own. The integration process could be long and painful, slowing down both companies while Google speeds further ahead. Eliminating redundancies at the staff, technology and product levels would be a major undertaking.