Microsoft Moves on Yahoo!

Updated from 8:27 a.m. EST

The morning after search giant Google(GOOG Quote) disappointed traders with its earnings report, Microsoft (MSFT Quote) has proposed acquiring Yahoo! (YHOO Quote) for $31 a share in a cash-and-stock offer valued at about $44.6 billion.

"We believe our combination will deliver superior value to our respective shareholders and better choice and innovation to our customers and industry partners," Microsoft CEO Steve Ballmer said in the statement announcing the deal.

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Microsoft's offer gives Yahoo! shareholders the option to receive cash or a fixed number of shares of Microsoft common stock. The total amount payable to Yahoo! shareholders would consist of one-half cash and one-half Microsoft common stock. The offer represents a 62% premium above Yahoo!'s Thursday closing price of $19.18.

The proposal included the letter Microsoft sent to Yahoo!'s board of directors, and focuses largely on the online advertising opportunity. Also, the statement says Microsoft believes the deal will generate at least $1 billion in annual synergy for the combined entity.

Yahoo! released only a short statement in response, saying its board "will evaluate this proposal carefully and promptly in the context of Yahoo!'s strategic plans and pursue the best course of action to maximize long-term value for shareholders."

"Microsoft shareholders will complain that management is overpaying, but much like the News Corp. (NWS Quote) for Dow Jones deal, you just have to pay a premium for the leading brand names," says Jon Markman of Markman Capital Insight and a contributor to TheStreet.com.

Yahoo! shares were rising $9.03, or 47%, to $28.21. Microsoft, based in Redmond, Wash., was at $30.51, down $2.09, or 6.4%, from the last close. Yahoo!, Sunnyvale, Calif., has spent the last 52 weeks between $18.58 and $34.08.

Rumors that Microsoft would try to take over Yahoo! have surfaced from time to time over the past couple of years as the entrenched tech giants tried to figure out how best to deal with the emergence of Google as the king of the Internet and the site of choice for Web advertising.

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Microsoft noted in its press release announcing the bid that the online advertising market is growing rapidly, from more than $40 billion in 2007 to an estimate approaching $80 billion by 2010.

The Windows operating system maker and operator of the MSN network said the "benefits of scale along with the associated capital costs for advertising platform providers make this a time of industry consolidation and convergence. Today this market is increasingly dominated by one player," a clear reference to Google.

Microsoft said that with Yahoo!, it "can offer a competitive choice while better fulfilling the needs of customers and partners."

Additionally, Microsoft said it believes the proposed combination would be cleared by regulators, and it said it could close the deal in the second half of this year.