Microsoft said today it has offered to buy Yahoo for $44.6 billion (€30 billion) in cash and stock to join forces against Google.
In the unsolicited bid, Microsoft offered to buy Yahoo for $31 (€20.88) per share, a 62 per cent premium over Yahoo's closing stock price on Nasdaq yesterday.
Yahoo shares jumped to $30.75 (€20.70) in premarket trading.
Yahoo said the online advertising market is growing rapidly and expected to reach nearly $80 billion (€54 billion) by 2010 from just over half that last year. Yahoo added it is "increasingly dominated by one player," referring to internet search leader 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 Chief Executive Steve Ballmer said.
Microsoft said it hopes to offer a "credible alternative" to Google through the tie-up, offering greater choice to advertisers, increasing research and development spending and stripping out overhead costs.
Yahoo has been losing market share to Google and warned earlier this week that it faced "headwinds" in 2008, forecasting revenue below Wall Street estimates.
The unexpected approach comes a year after the two companies held talks over a possible commercial partnership to challenge Google, although Yahoo rejected merger proposals at the time because it hoped to reap benefits from an overhaul of the business.
If Yahoo's board agrees, the merger could be completed in the second half of the year. But Microsoft also hinted at a hostile bid by reserving the right "to pursue all necessary steps" to win over the firm's shareholders if the deal is opposed.