Legg's Miller says Microsoft should boost Yahoo bid

By Muralikumar Anantharaman

BOSTON (Reuters) - A star money manager at Yahoo's (YHOO.O: Quote, Profile, Research) second-biggest shareholder said Microsoft (MSFT.O: Quote, Profile, Research) must raise its unsolicited $41.6 billion (21.2 billion pound) takeover offer for the Internet firm.

Bill Miller of U.S. asset manager Legg Mason (LM.N: Quote, Profile, Research) estimated Yahoo's fair value at $40 a share -- a premium on the $31 a share offered by Microsoft on January 31. That would be almost 30 percent higher than Microsoft's offer. Yahoo shares closed at $19.18 before the offer was made.

Yahoo rejected the bid by the world's biggest software maker as too low on Monday.

"We think MSFT (Microsoft) will need to enhance its offer if it wants to complete a deal," Miller said in a quarterly letter to investors of the firm's flagship Value Trust fund. The letter, dated Feb 10, was released on Tuesday.

Miller was unavailable for comment.

Miller, in his letter, said he and his team met with Microsoft Chief Executive Steve Ballmer and spoke with Yahoo CEO Jerry Yang after Microsoft's bid on January 31.

But the fund manager suggested Yahoo may ultimately need to embrace Microsoft, saying it would struggle as an independent company.

"We think it will be hard for YHOO (Yahoo) to come up with alternatives that deliver more value than MSFT will ultimately be willing to pay," said Miller.