The surprise offer of $31 per share seizes on Yahoo's financial troubles, gives Microsoft a new chance to take on Google and could shape the technological landscape for years to come. Microsoft's bid, made late Thursday and announced Friday, represents a 62 percent premium above Yahoo's closing stock price Thursday.
In a statement Friday, Yahoo said it will "carefully and promptly" study Microsoft's offer.
Yahoo has lost market share to Google and watched its profits dwindle in the Web search market. The company warned earlier this week that it faced "headwinds" in 2008, forecasting revenue below Wall Street estimates, according to a Reuters report
Google controls nearly 60 percent of the U.S. search market and has widened its lead, despite the efforts of second-place Yahoo and third-place Microsoft.
In conference call Friday morning, Microsoft Chief Executive Steve Ballmer signaled that he won't take no for an answer after Yahoo rejected takeover overtures a year ago, the Associated Press reported.
"This is a decision we have -- and I have -- thought long and hard about," Ballmer said. "We are confident it's the right path for Microsoft and Yahoo."
Speculation of a possible deal has been swirling for months in the technology sector. Microsoft's previous offer was rebuffed by Terry Semel, who stepped aside last year as chief executive under shareholder pressure.
Yahoo would reportedly make Microsoft dominant in Web banner ads used by corporate brand advertisers. Some analysts, however, questioned how two companies with such similar products -- among them e-mail and instant messaging -- and such different corporate cultures could successfully combine.
"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," Tim Smalls, head of U.S. stock trading at brokerage firm Execution LLC, told Reuters.
The deal also represents Microsoft's tacit admission that it has failed to present a serious challenge to Google in the lucrative Web search and online advertising market.
"The deal is an implicit acknowledgement that Microsoft's expensive foray into online services is failing, or at least not moving fast enough," The Wall Street Journal reported. "The company has tried to build a strong presence in Internet search and other online services but hasn't dented Google's leading market share."
Yahoo attracts more than 500 million people monthly to a network of sites devoted to news, finance and sports as well as Yahoo Mail, the No. 1 consumer e-mail service. If the buyout succeeds, it would be the biggest Internet deal since the Time Warner-AOL merger.