Microsoft intends to continue to pursue its purchase of Yahoo!.

Yahoo! has formally rejected Microsoft’s unsolicited $41.8 billion (£21.5 billion) offer, saying it “substantially undervalues” the internet group.

The company’s Board of Directors has carefully reviewed Microsoft’s unsolicited proposal with Yahoo!’s management team and financial and legal advisors, and has unanimously concluded that the proposal is not in the best interests of Yahoo! and its stockholders.

The leading global internet brand believes that the proposal “substantially undervalues Yahoo! including its global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as its substantial unconsolidated investments.”

Leaving the door open with regard to its future, Yahoo! stated: “The Board of Directors is continually evaluating all of its strategic options in the context of the rapidly evolving industry environment and we remain committed to pursuing initiatives that maximise value for all stockholders.”

Goldman, Sachs & Co., Lehman Brothers and Moelis & Company are acting as financial advisors to Yahoo!. Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal advisor to Yahoo!, and Munger Tolles & Olson LLP is acting as counsel to the outside directors of Yahoo!.

It is thought that the move may lead Microsoft, which unveiled its $31(£16) a share offer earlier this month, to launch a proxy contest and seek to replace Yahoo!’s board at its annual meeting in June.

Steve Ballmer, Microsoft’s Chief Executive, has already signalled the software giant’s determination not to take no for an answer; within the letter making the offer, he said his company “reserves the right to pursue all necessary steps”.