MICROSOFT HAS dropped its bid to buy Yahoo after the internet company rejected its offer to raise the price by $5 billion (€3.24 billion) to $47.5 billion.

Microsoft said it offered to raise its $42.6 billion bid by about $5 billion, to $33 a share. Yahoo demanded $37, Microsoft said yesterday in a statement.

"After careful consideration, we believe the economics demanded by Yahoo do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal," said chief executive officer Steven Ballmer.

Microsoft, whose internet business lost $228 million last quarter, now faces the challenge of finding alternatives to buying Yahoo, a purchase that would have tripled its share of the US web search market.

Mr Ballmer and deputy Kevin Johnson met yesterday in Seattle with Yahoo co-founders Jerry Yang and David Filo, said two people familiar with the talks. Mr Yang and Mr Filo refused to accept less than $37 a share and flew back to California. Mr Ballmer called Mr Yang to inform him of the decision just before it was announced, the people said.

The decision leaves Yahoo chief executive officer Mr Yang (39) to prove he can revive sales growth and the stock price by keeping the company independent.

In a statement issued at the weekend, Yahoo chairman Roy Bostock said: "We remain focused on maximising shareholder value and pursuing strategic opportunities that position Yahoo for success and leadership in its markets.

"From the beginning of this process, our independent board and our management have been steadfast in our belief that Microsoft's offer undervalued the company and we are pleased that so many of our shareholders joined us in expressing that view."

Reacting to the news, analysts predicted yesterday that Yahoo's share price will fall $8 to $28 in New York. - (Reuters/Bloomberg)