Yahoo's websites were the world's third-most-visited in December, behind Google and Microsoft's, according to Nielsen. The Sunnyvale, Calif., company has continued to surrender online advertising market share to Google, which earned more than six times as much money in 2007 thanks to the text ads it delivers with search-engine results.
After resurrecting the company after the dot-com crash early this decade, Terry Semel stepped down as Yahoo's chief executive in June under pressure from shareholders. Co-founder Jerry Yang replaced him but so far has made little visible progress competitively. Semel resigned as chairman on Thursday.
Microsoft had proposed joining forces in a number of ways during the last few years, only to be turned down by Yang and other top executives. This week, after Microsoft reported strong quarterly earnings and Yahoo gave a weak forecast, the software giant's chief executive, Steve Ballmer, acted.
Ballmer called Yang and said he was ready to go public with a generous offer that could force the hand of Yahoo's board of directors. With Yang still noncommittal, Microsoft made good on the threat Friday.
"Only in the last couple of weeks has it gotten patently evident that it's the right thing to do," said a veteran of both companies who requested anonymity because he still worked with them. "The perception is, it's such an extraordinary alignment of opportunity that it would be egregious not to make this play. It's the best possible counter to Google's continued growth."
Analysts said the large premium made it likely that Microsoft would close the deal unless Yahoo found another suitor. Rupert Murdoch's News Corp., which last year proposed swapping its MySpace social-networking site for a 25% stake in Yahoo, is likely to remain on the sidelines of the costly bidding, a person who spoke with executives there said.
Analysts said Yahoo's only alternative might be to try outsourcing its search-advertising business to Google, essentially turning to its prime competitor to fend off Microsoft.
Investors expecting the half-cash, half-stock deal to be completed bid Yahoo stock up $9.20 to $28.38, while Microsoft slipped $2.15 to $30.45. Executives said Microsoft's earnings would be depressed by such an acquisition until the second full fiscal year after it closed.
"The result will be an incredibly efficient and competitive offering for consumers, for advertisers and for publishers," Ballmer said on a conference call with analysts.
