Unsolicited bid follows bad headlines for Yahoo and could create strong challenge to Google.
Microsoft has made an unsolicited offer to buy Yahoo for $44.6 billion in cash and stock, seeking to join forces against Google in what would be the biggest Internet deal since the Time Warner-AOL merger.
In its boldest-ever acquisition move, Microsoft said on Friday it offered $31 per share for Yahoo, or a 62 percent premium over the Internet media company's closing stock price on Nasdaq Thursday.
Yahoo, whose shares jumped to $30.75 in premarket trading, said it would evaluate the bid.
Microsoft shares, which have a market capitalization of about $300 billion, fell 6 percent to $30.78.
Speculation over a Microsoft move on Yahoo has swirled for at least a year, as investors wondered whether the two would seek a joint stand against an ever more powerful Google.
Internet audience researcher comScore estimates Google's share of the worldwide Web search market has reached 77 percent, while Yahoo is second with 16 percent and Microsoft was a distant third with 3.7 percent.
"Microsoft's wanted to do things that could build up its online business dramatically," said Brendan Barnicle, an analyst at Pacific Crest Securities. "This is going to be a big bet for them. But I also think it's where they see the market going, so they really needed to get there.
"This is more than a shot across the bow at Google, because you put these two guys together who are basically two and three in search and makes them far more relevant," he added.
Critics of a tie-up, however, have pointed out that Microsoft and Yahoo have very different corporate cultures and many overlapping businesses, from instant messaging to email and advertising, as well as news, travel and finance sites.
"To me, the premium seems exorbitant, for what is a dwindling business. I personally don't see how the synergies of Microsoft-Yahoo is going to take on Google," said Tim Smalls, head of U.S. stock trading at brokerage firm Execution LLC.
Yahoo attracts more than 500 million people monthly to a range of media sites including Yahoo Mail, the world's biggest e-mail service for consumers.
It has been losing market share to Google in the increasingly strategic Web search market, and warned earlier this week that Yahoo faced "headwinds" in 2008, forecasting revenue below Wall Street estimates.
Microsoft said the online advertising market is growing rapidly and expected to reach nearly $80 billion by 2010 from over $40 billion in 2007. It added it is "increasingly dominated by one player," referring to Google.
"We have great respect for Yahoo, and together we can offer an increasingly exciting set of solutions for consumers, publishers and advertisers while becoming better positioned to compete in the online services market," Microsoft CEO Steve Ballmer said in a statement.
Microsoft, the world's largest software company, said it had identified four areas that would generate at least $1 billion in annual synergies for the combined entity.
Under the proposal, Yahoo shareholders can choose to get $31 cash, or 0.9509 of a share of Microsoft common stock. The deal in aggregate must consist of one-half cash and one-half Microsoft common stock, it said.
Mark May, analyst at Needham & Co, said that while the price is a premium to Yahoo's recent trading price, it was in line with its average trading value over the last 2 years.
"I would not be surprised to see this bid have to be raised over time," he said. "I think there are companies out there like Comcast and Viacom and others that still need to address the emergence of online media and haven't. So there are clearly other strategic companies out there."
The Microsoft-Yahoo deal would be the largest in the Internet market since the $182 billion purchase of Time Warner by AOL in 2001, which was seen as the worst merger in recent corporate history, with clashing corporate cultures and many of the promised synergies never materializing.