Microsoft has no immediate plans to sweeten its $42 billion (£21.5 billion) cash-and-shares offer for Yahoo!, the software group’s chairman said yesterday, in an attempt to counter speculation that it will make a higher bid for the internet company.

Bill Gates said that Microsoft’s bid was “full and fair” and insisted that there had been no confidential negotiations between the two sides to try to agree a deal after Yahoo! rejected his group’s original bid this month.

Mr Gates said: “There is nothing new in terms of the process. We’ve sent our letter and we’ve reinforced that we consider that it’s a very fair offer.”

However, many analysts think that Microsoft has to increase its offer to at least $35 a share to persuade Yahoo!’s board to negotiate.

Mr Gates declined to spell out what he planned to do next. The expectation is that Microsoft aims to test the opinion of Yahoo! shareholders by nominating alternative directors to challenge the Yahoo! board. The deadline for filing is March 13.

The Microsoft chairman sought to justify the bid, arguing that only Google had scale in web search and that a united Yahoo! and Microsoft would be able to be more competitive by combining their technical expertise and research and development. Yahoo! is No 2 in search, but Microsoft lags far behind despite repeated attempts to improve the quality of its own MSN Search offering.

Mr Gates said: “We can afford to make big investments in the engineering and marketing that needs to get done. We will do that with or without Yahoo! But we also see that we’d get there faster if the great engineering work that Yahoo! has done and the great engineers here [in Microsoft] were part of the common effort.”

Separately, there were signs yesterday that Alibaba, Yahoo!’s Chinese partner, was trying to exert some influence in the deal. Yahoo! owns 39 per cent of Alibaba, which runs an internet marketplace. The business is controlled by Jack Ma, its founder, who wants to retain a similar level of autonomy under any new ownership.

Yahoo! believes that its shareholding has been undervalued by investors, which was one reason used to justify its rejection of the original Microsoft bid. Yahoo!’s predator is confident that it can reach a satisfactory resolution over China, although it is not prepared to spell out what gives it confidence that it can deal with the situation.

Microsoft orginally bid $31 a share — half in cash and half in stock. A subsequent fall in its share price means that the bid was valued at $29 for every Yahoo! share at Monday’s close.

Mr Gates’s remarks yesterday had the desired effect, with Yahoo! shares easing 44 cents to $29.22. Microsoft, meanwhile, rose 39 cents to $28.70, meaning that its offer is worth $29.15 a share, in line with current prices.

Yahoo! is frantically exploring other options, which include seeking to reach an agreement with either Time Warner or News Corporation, the parent company of The Times.

Last night it was reported that Yahoo! plans to offer its employees enhanced severance benefits in the event of their jobs being cut after a change in control of the company.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive