BOSTON (Bloomberg) - Legg Mason Inc. fund manager Bill Miller, the second-biggest shareholder of Yahoo! Inc., said Microsoft Corp. will need to raise its $44.6 billion offer to buy the Internet company.

"We think Microsoft will need to enhance its offer if it wants to complete a deal," Mr. Miller, 58, wrote in a February 10 letter to shareholders released yesterday by the Baltimore-based company.

Miller heads Legg Mason Capital Management, which owned about 80 million shares, or six percent, of Yahoo on September 30, Bloomberg data show. Microsoft, the biggest software maker, on January 31 bid $31-per-share to buy Yahoo, 62 percent more than the closing price the day before the offer. Yahoo rejected the bid on Monday, saying it "substantially undervalues" the company.

"We think this deal is a strategic imperative for Microsoft, and that Yahoo is in a tough spot if it wishes to remain independent," Mr. Miller wrote. "It will be hard for Yahoo to come up with alternatives that deliver more value than Microsoft will ultimately be willing to pay."

Microsoft, based in Redmond, Washington, responded on Monday to the Yahoo board's rejection with a statement calling its offer a "full and fair proposal." The company did not disclose its next steps and said it is "moving forward" with its $31-a-share bid for Sunnyvale, California-based Yahoo.

Mr. Miller said Legg Mason's own calculations put Yahoo's value in the range of $40 or more per share.

Mr. Miller, whose subsidiary is the biggest holder of Countrywide Financial Corp., said in the letter released yesterday that he has not decided to back the bid by Bank of America Corp. to buy the largest US home lender.

The offer has "truncated" any gains in Countrywide's shares, Mr. Miller said. Bank of America, based in Charlotte, North Carolina, on January 11 agreed to buy Countrywide after the stock lost 85 percent of its value in a year. The bank's takeover bid equates to less than $8 a share for Calabasas, California-based Countrywide.

Legg Mason Capital Management owned about 11.8 percent of Countrywide's shares on December 31, according to Legg Mason. Since then, Legg Mason has increased its stake to 14.9 percent and asked Countrywide to eliminate its "poison pill" provision so it can buy more if it chooses to, according to Mr. Miller's letter.

Mr. Miller's $16.5 billion Legg Mason Value Trust is entering its third straight year of trailing the Standard & Poor's 500 Index.

The fund had fallen 11 percent this year through yesterday, lagging behind the S&P 500's 8.6 percent decline. His 15-year streak of beating the main US equity benchmark ended in 2006. The money manager is known for making against-the-grain bets and holding them for years.

Value Trust fell 6.6 percent in 2007, partly because of investments in homebuilders and financial companies, which tumbled as US delinquencies on sub-prime mortgages rose to a record.