Yahoo cut its revenue forecasts earlier this week and said it would have to spend an additional $300m this year trying to revive the company.It has been struggling in recent years to compete with Google, which has also been a competitor to Microsoft.
"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.
There has not yet been any comment from Yahoo.Its chief executive, Jerry Yang, announced on Tuesday that he intended to lay off 1,000 staff as part of a restructuring plan.
Terry Semel, who stepped down as chief executive last June, also quit as non-executive chairman on Thursday.Microsoft said that Yahoo shareholders could choose to receive either cash or shares.
Yahoo shares have fallen 46% since reaching a year-high of $34.08 in October. They rose 54% in pre-market trading."Ultimately this corporate marriage was forced by the rise of Google, which has grown into a serious competitor for both Microsoft as a software company and Yahoo as an internet portal," said Tim Weber, business editor of the BBC News website.
"It is a shotgun marriage, but the person holding the shotgun is Google."
According to its letter to Yahoo, Microsoft attempted to enter talks about a deal a year ago, but was rebuffed because Yahoo was confident about the "potential upside" presented by the reorganisation and operational activities that were being put in place at the time.
"A year has gone by, and the competitive situation has not improved," Microsoft's letter said. But there has been some concern about the price that Microsoft is offering."To me, the premium seems exorbitant, for what is a dwindling business," said Tim Smalls from the brokerage firm Execution LLC.
"I personally don't see how the synergies of Microsoft-Yahoo is going to take on Google."Other analysts were more enthusiastic about the offer."It is a fantastic offer. It is game on," said Colin Gillis from Canaccord Adams.