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Microsoft offers to buy Yahoo for $44.6 billion

Microsoft announced early Friday that it has made a proposal to the board of directors of Yahoo to buy the company for $31 a share, which amounts to $44.6 billion.

In a stunning move, Microsoft announced early Friday that it has made a proposal to the board of directors of Yahoo to buy the company for $31 a share, which amounts to $44.6 billion.

Yahoo described the offer as "unsolicited" but indicated that it would nonetheless mull over the offer.

The price per share represents a 62% premium above the value of Yahoo's stock when markets closed Thursday, which was $19.18. However, Reuters reported that Yahoo's stock jumped to $30.75 in pre-market trading.

"Microsoft's consistent belief has been that the combination of Microsoft and Yahoo! clearly represents the best way to deliver maximum value to our respective shareholders, as well as create a more efficient and competitive company that would provide greater value and service to our customers," Steve Ballmer, Microsoft CEO, wrote in a letter to the Yahoo Board of directors. The letter can be read in its entirety here.

Ballmer does not mention Google by name -- "Today, the market is increasingly dominated by one player" -- but, given the struggles that both Microsoft and Yahoo have had in taking on Google individually, it is clear that Google is the target. According to research cited in the Reuters report, Google's share of global Web search is a staggering 77%. Yahoo and Microsoft combine for fewer than 20% of the search share.

Yahoo released a brief response to Microsoft's proposal: "The Company said that its Board of Directors will evaluate this proposal carefully and promptly in the context of Yahoo!'s strategic plans and pursue the best course of action to maximize long-term value for shareholders."

As BBC News reported, these are tough times for Yahoo. Friday morning pre-market trading notwithstanding, the company's stock price has slid 46% since surpassing $34 a share in October. Just this week, Yahoo announced plans to shed 1,000 workers and chairman Terry Semel quit.

Better luck the second time around?

This is not the first time that a Microsoft-Yahoo merger has been discussed.

Ballmer's letter indicated that Microsoft offered to buy Yahoo in late 2006, only to be turned down in February 2007. "These discussions were based on a vision that the online businesses of Microsoft and Yahoo! should be aligned in some way to create a more effective competitor in the online marketplace," the Microsoft CEO wrote. "We discussed a number of alternatives ranging from commercial partnerships to a merger proposal, which you rejected.

At that time, as The Register pointed out, Yahoo "bet the farm" on Project Panama, its platform for distributing online advertising. That endeavor is not succeeding. As Ballmer put it to the Yahoo Board of Directors, "A year has gone by, and the competitive situation has not improved."

In referencing how the Microsoft-Yahoo combination could compete with Google, Ballmer listed four main areas of alignment -- an economy of scale, an expanded capacity for research and development, improved operational efficiencies and a focus on "emerging user experiences" such as mobile services and online commerce.

Microsoft said it expects the deal to be completed in the second half of 2008. The company does not expect to meet any regulatory resistance.

Were the deal to go through, it would represent the largest tech firm deal since the AOL-Time Warner merger, as the Reuters report indicated.

The blogosphere reacts

Not surprisingly, the news has prompted much reaction from the blogosphere. The word "wow" is common, particularly in the TechCrunch conversation about the Microsoft-Yahoo story. (Slashdot readers are a bit more worried.)

James Mowery of Tech In Demand suggested, "This deal could be the most important acquisition so far this century," adding, "Wall Street analysts believe this deal is very likely to go through."

Allen Stern of Center Networks, meanwhile, was blogging throughout Microsoft's conference call Friday morning. The main message seemed to be that Microsoft felt its own research and development capabilities were not enough to take on Google alone.

Finally, Mary Jo Foley points out in her All About Microsoft blog that the online business at Microsoft pales in comparison to the software business. It is obvious, but it is worth noting.

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