Yahoo! formally rejected Microsoft's hostile $45 billion (£23 billion) bid today, claiming that despite the 62 per cent premium offered by the software giant, the bid "substantially undervalues" the world's No 2 search engine.

The under-siege company said that it was "continually evaluating all of its strategic options" — code for saying that it would consider counter-proposals, although it will have to contend with further pressure from Microsoft, which has talked about forcing a shareholder vote.

Yahoo! highlighted the size of its online audience, its investment in improving its advertising platform and "substantianal unconsolidated investments" — a reference to its valuable minority stakes in Japan and China — as reasons why the bid should be turned down.

However, it faces a challenge. The Microsoft bid represents 66 times last year's earnings at a company that has seen quarterly profits decline for eight successive quarters, and market share continue to drop against Google.

The rejection came in a surprisingly brief three paragraph statement, in which one of the three paragraphs was taken up by a listing of the six advisers involved in helping the company in its defence. No additional material was immediately available.

The Yahoo! board came to its decision at a meeting of its board on Friday night.

The company is understood to be attempting to restart merger talks with AOL, the online business owned by Time Warner, as a means of defending itself against Microsoft’s hostile approach. Tie-ups with groups such as Google or Disney are also being considered.

The Times has learnt that Yahoo! and its team of advisers from Goldman Sachs and Lehman Brothers, the US investment banks, have spent the past week evaluating possible tie-ups with media and technology companies that would save it from being swallowed by Microsoft.

Currently, Microsoft has proposed paying $31 in cash and shares, with up half of the offer to be paid in cash.

Yahoo! has suffered eight consecutive quarters of profit decline, losing part of its share of the $40 billion online advertising market to dominant rival Google.

Microsoft is attempting to engage with major Yahoo! shareholders to convince them of the merits of its bid. It is also understood to be considering a proxy fight to oust most of the Yahoo! board.

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