Yahoo!'s second-biggest shareholder urged Microsoft to raise its bid for the company this week, just days after Yahoo!'s board of directors rejected the software giant's $44.6 billion buyout offer.  Bill Miller, an asset manager at Legg Mason, said Yahoo! was worth about $40 a share, compared with the $31 per share Microsoft offered about 10 days ago.

"It will be hard for \[Yahoo!\] to come up with alternatives that deliver more value than \[Microsoft\] will ultimately be willing to pay," he wrote in a letter to investors. "We think this deal is a strategic imperative for \[Microsoft\] and that \[Yahoo!\] is in a tough spot if it wishes to remain independent. \[Microsoft\] will need to enhance its offer if it wants to complete a deal."

Institutional shareholders like Legg Mason own about 75 percent of Yahoo!'s stock and are believed to overwhelmingly support Microsoft's bid for Yahoo!, largely because of the way Yahoo!'s stock has declined in the past year. Yahoo! stock was trading at a four-year low when Microsoft made its offer. Not coincidentally, Yahoo! this week announced a layoff of 1000 employees.

Less clear is what Microsoft will do next. The software giant is widely expected to raise its offer to the $35 a share range, but could conceivably go as high as $40.

Meanwhile, Google has reportedly stopped investigating an advertising deal with Yahoo! that it had hoped would be lucrative enough to prevent the Yahoo! from succumbing to Microsoft. According to sources close to the company, Google fears that antitrust concerns would prevent any Google/Yahoo! alliance.