Yahoo! shares sank as slow as $22.97, before rallying slightly to close at $24.37, down 14%, as shareholders reacted to the failure to reach a deal after three months of talks.
Despite the dip, Yahoo!'s shares are higher now than they were when Microsoft first made its approach to the internet firm. Yahoo!'s shares had been trading at just over $19 prior to the bid.
Reassessing the company's prospects, analysts said that Yahoo! was still worth more than before the bid and its share price could be supported by strategic deals and the prospect of Microsoft returning at a later date.
Microsoft had originally bid $31 and then raised its bid to $33 a share, but it was not enough to secure a deal. Yahoo! had been looking for $37 -- a price that Microsoft was not prepared to meet.
Yahoo!'s two largest shareholders told The New York Times they would have sold for as little as $34.
Gordon Crawford, portfolio manager for Capital Research Global Investors, the largest Yahoo! shareholder with 16% of stock, told the paper: "I am extremely angry at Jerry Yang and at the so-called independent board."
Todd Dagres, general partner at venture capital fund Spark Capital, said: "This is going to play out over the next several months and there is still a chance Microsoft will buy the company for somewhere around $33 a share."
In a letter to Yang on Friday, Microsoft CEO Steve Ballmer, said he was disappointed that Yahoo! has not moved towards accepting it offer, which represented a 62% premium and he suggested intransigence on Yahoo!'s behalf.
He said: "In our conversations this week, we conveyed our willingness to raise our offer to $33 per share, reflecting again our belief in this collective opportunity.
"This increase would have added approximately another $5bn of value to your shareholders, compared to the current value of our initial offer.
"It also would have reflected a premium of over 70% compared to the price at which your stock closed on January 31. Yet it has proven insufficient, as your final position insisted on Microsoft paying yet another $5bn or more, or at least another $4 per share above our $33.00 offer."
Jerry Yang, the Yahoo! chief executive, has been criticised for his handling of the talks with Microsoft. In an interview, he told Reuters that he had "mixed feelings" about the failed deal, as investors reacted with disappointment.
However, he did say that the door was open should Microsoft wish to return to the table. He said: "We were negotiating a way to find common ground and then on Saturday they chose to walk away. They started it and they walked away.
"If they have anything new to say, we would be open... I am more than willing to listen."