Microsoft bids £22bn for Yahoo

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The Independent Online

Software giant Microsoft threw down the gauntlet to Google's online dominance today with a $44.6bn (£22.4bn) approach for internet search engine Yahoo.

The combination would allow the two companies to put up a bigger challenge in an advertising market "increasingly dominated by one player", Microsoft said.

The proposal follows predictions that the online advertising market will double in size to around $80bn (£40.2bn) by 2010.

The unexpected approach comes a year after the two companies held talks over a possible commercial partnership to challenge Google, although Yahoo rejected merger proposals at the time because it hoped to reap benefits from an overhaul of the business.

But the suitor said today in a letter to Yahoo's board: "While a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo that we are proposing.

"A year has gone by, and the competitive situation has not improved."

The proposal comes days after Yahoo reported a 23% fall in fourth-quarter profits, signalling that economic difficulties in the US are spilling over into the lucrative online advertising market.

Microsoft said its $31 a share (£15.59) offer for Yahoo represented a 62 per cent premium to the search engine's closing share price yesterday.

The software giant hopes to offer a "credible alternative" to Google through the tie-up, offering greater choice to advertisers, increasing research and development spending and stripping out overhead costs.

The company aims to make $1bn (£503m) in cost savings every year through the deal.

If Yahoo's board agrees, the merger could be completed in the second half of the year. But Microsoft also hinted at a hostile bid by reserving the right "to pursue all necessary steps" to win over the firm's shareholders if the deal is opposed.