Microsoft has offered $44.6 billion in cash and shares to acquire Yahoo, the equivalent of $31 per share - 62 per cent above Yahoo's closing share price on Thursday.
"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," said Microsoft CEO Steve Ballmer.
"Our lives, our businesses, and even our society have been progressively transformed by the web, and Yahoo! has played a pioneering role by building compelling, high-scale services and infrastructure," said Ray Ozzie, chief software architect at Microsoft.
"The combination of these two great teams would enable us to jointly deliver a broad range of new experiences to our customers that neither of us would have achieved on our own."
The bid comes shortly after Yahoo confirmed Terry Semel was stepping down as non-executive chairman, six months after handing over his CEO title to Jerry Yang.
Semel is leaving the board effective immediately, Yahoo announced yesterday. He will be replaced as non-executive chairman by another board member, Roy Bostock, the company said.
Announcing its bid, Microsoft pointed out the value of the online ads market, suggesting it will be worth $80 billion by 2010.
"Today this market is increasingly dominated by one player. Together, Microsoft and Yahoo! can offer a competitive choice while better fulfilling the needs of customers and partners," the company said.