Google shares fell $48.40 to $515.90, a day after its fourth-quarter profit and revenue fell short of analysts' expectations. The company declined to comment on the proposed merger.
Yahoo had declined to enter into acquisition talks as recently as February of last year, saying it had a strategy to turn things around, according to the offer letter Microsoft made public Friday. "A year has gone by, and the competitive situation has not improved," Ballmer wrote to Yahoo's board.
After taking over in June, Yang said he would take 100 days to review the state of the company. Seven months later, shareholders said they had not seen any substantial changes.
"Investors lost faith in the company," said analyst Anthony Valencia of TCW Group in Los Angeles. "They waited and waited."
More than seven times larger than its $6-billion acquisition of Web advertising specialist AQuantive, Microsoft's Yahoo bid is tantamount to a dramatic admission that the company needs help making a run at Google as the world uses the Web for more daily tasks.
"The old Microsoft strategy of pouring money in until it works wasn't going to do it," analyst Charles DiBona of Sanford C. Bernstein said. "You have to give them some credit for changing gears."
Microsoft executives said that combining research and development efforts could produce better ad targeting based on consumer behavior. And Hollywood studios would be more willing to cut deals with a company that reaches a broader audience.
Ballmer acknowledged the power of the Yahoo brand, which has earned consumer trust while Microsoft labels such as Windows Live Search have left people scratching their heads.
"Microsoft can't try to brand it all Microsoft," Citigroup analyst Brent Thill said.
Thousands of employees at each company labor on competing products in areas such as e-mail, search, portals, ad services, news and maps. Microsoft said it would save $1 billion a year by joining forces. Staffers said they expected job cuts at both firms.
Yahoo has had a series of focused partnerships with Microsoft -- at times delivering ads and providing search technology for the MSN portal. Nevertheless, opposition to all things Microsoft has motivated the troops there.
"There's certainly anti-Microsoft sentiment," one Yahoo employee said on condition of anonymity. "People would be happy to have a counteroffer."
Hostile takeovers are rare in the software industry because the workforce is often the most-prized asset. Microsoft executives said they would offer incentive packages to retain top talent.
Although the marriage won't be easy, Microsoft earns so much money from its software businesses that it could recover even from a bungled integration of Yahoo's Web properties, Pacific Crest Securities analyst Brendan Barnicle said. "They can get a lot of this stuff wrong and you'll never know," he said.
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joseph.menn@latimes.com
jessica.guynn@latimes.com
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Times staff writer Alana Semuels contributed to this report.
