Microsoft had offered US$47.5 billion, which translated into US$33 per share but Yahoo wanted US$57 billion (US$37 a share). Initially, the software giant in February had offered US$44.6 billion or US$31 a share but raised the offer as negotiations proceeded.

Microsoft announced its decision to withdraw after talks between its Chief Executive Steven A Ballmer and Yahoo co-founder Jerry Yang in Seattle failed to produce an agreement on Saturday.

Microsoft had made an unsolicited bid to buy Yahoo so as to compete with Google search engine. Mr Ballmer, in a letter to Mr Yang, pointed out that Microsoft had already raised its bid by about US$5 billion and despite its best efforts, Yahoo has not “moved towards accepting our offer”.

Does not make sense

“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,” he said.

Meanwhile, Yahoo dismissed Microsoft’s unsolicited bid as a “distraction”.

“Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo undesirable as an acquisition for Microsoft.” “We continue to believe that our proposed acquisition made sense for Microsoft, Yahoo and the market as a whole,” Mr Ballmer said in the letter posted on the Microsoft website. He expressed confidence that Microsoft move towards its goal to pursue its online efforts on its own.

 “We have a talented team in place and a compelling plan to grow our business through innovative new services and strategic transactions with other business partners,” Mr Ballmer said.

MSNBC.COM, a joint venture of Microsoft and NBC Universal, quoted Mr Ballmer as saying he had concluded that pursuing the hostile option through a so-called proxy battle was “not sensible”.

But Yahoo hasn’t necessarily faded from Microsoft’s cross hairs, it said, adding Microsoft could “conceivably” renew its bid later this year if Yahoo cannot bounce back from more than two years of financial lethargy. Yahoo Chairman Roy Bostock said in a statement the company believed from the beginning that Microsoft’s offer undervalued it, and the board was “pleased that so many of our shareholders joined us in expressing that view.”

Mr Ballmer cited Yahoo’s Google plans as one reason Microsoft was walking away rather than mounting a hostile offer.

On Saturday, Mr Yang and Yahoo co-founder David Filo met Mr Ballmer and Microsoft Platforms & Services Division President Kevin Johnson in Seattle, where they communicated that Yahoo’s board was willing to cut a deal at $37 a share, although the two co-founders remained committed to a dollar more per share, sources said.