In what is turning out to be a titanic battle of wits, Yahoo Inc, responding to a three-week deadline issued by Microsoft Corp to accept its $42 billion takeover bid, rejected the deal for undervaluing the Web pioneer.

Rejecting the buyout offer as too low, Yahoo, however, said it is open to software giant’s deal if it “is superior to our other alternatives.”

Yahoo was responding to a letter on Saturday from Microsoft Chief Executive Steven Ballmer threatening to take the offer directly to Yahoo shareholders and to lower offer price if the two companies failed to reach a negotiated deal in next three weeks. In a defiant open letter addressed to Mr Ballmer, the Yahoo board said, “We continue to believe that your proposal is not in the best interests of Yahoo and our stockholders. Contrary to statements in your letter, stockholders representing a significant portion of our outstanding shares have indicated to us that your proposal substantially undervalues Yahoo.”

Proxy battle

Yahoo said software giant’s threat of proxy battle was counterproductive and Yahoo would only be open to a better deal. “We consider your threat to commence unsolicited offer and proxy contest to displace our independent board members to be counterproductive and inconsistent with your stated objective of a friendly transaction. We are open to all alternatives that maximise stockholder value,” the letter said.