Yahoo! Inc. [YHOO] might be balking at Microsoft Corp.'s [MSFT] $44.6 billion unsolicited offer, but at least one big shareholder thinks its pretty much a done deal. Legg Mason Inc., with about 6% of Yahoo!'s shares the second-largest shareholder of the Internet search company, in a quarterly update to clients said that after speaking with Microsoft CEO Steve Ballmer and Yahoo! chief and cofounder Jerry Yang, a deal seems all but inevitable.

The note, penned by Legg Mason Capital Management chief Bill Miller, said that Yahoo! is in a tricky spot if it intends to remain independent. That said, Microsoft will have to boost its offer to seal the deal, he added. Here's an excerpt of the letter, which was released Tuesday but dated Sunday, Feb. 10, the day before Yahoo! rejected Microsoft's offer:

YHOO's Board has pledged to give the offer careful consideration and to do what they believe will deliver the most long-term value to YHOO owners. That is the right message, and we are waiting to hear their views as they develop. That said, we think it will be hard for YHOO to come up with alternatives that deliver more value than MSFT will ultimately be willing to pay.

We think this deal is a strategic imperative for MSFT, and that YHOO is in a tough spot if it wishes to remain independent. It has been reported that MSFT has been discussing a combination with YHOO for well over a year, and that it had been prepared to pay over $40 per share previously. We have no way of knowing whether those reports are accurate or not.

Our own valuation work puts the value of YHOO in the range of those reported numbers, though, and we think MSFT will need to enhance its offer if it wants to complete a deal. YHOO shares were recently trading at a four-year low, and the stock averaged above the current offer price for all of 2004.

YHOO is a uniquely valuable asset, and we expect MSFT will do what it takes to acquire it.

Earlier, Bloomberg reported that a T. Rowe Price fund manager favors the Microsoft offer and would be raise a stink if Yahoo! passed on a sweetened bid. T. Rowe Price is the 12th-largest institutional holder of Yahoo! shares.

Tech writer John Quain agrees that Yahoo!'s days are numbered. He writes, "Yahoo's apparent rejection reminds me of those wonderfully subversive Nancy Reagan-era 'Just Say No' buttons that when tilted said 'Yes!' " -- Olaf de Senerpont Domis

See Feb. 12 note from Legg Mason via Yahoo News
See Feb. 11 story from Tech Confidential
See Feb. 12 post from JQ on Technology