SAN FRANCISCO (MarketWatch) -- In a dramatic move that could significantly reshape the Internet services industry, Microsoft Corp. on Friday offered to buy Yahoo Inc. for $44.6 billion in an effort to team up on online-advertising juggernaut Google Inc.
In a brief statement, Yahoo said it "will evaluate this proposal carefully and promptly in the context of Yahoo's strategic plans and pursue the best course of action."
'Today this market is increasingly dominated by one player. Together, Microsoft and Yahoo! can offer a competitive choice.' — Microsoft statement
"Google poses a clear long-term threat to Microsoft's business ... But Microsoft and Yahoo together would make a significant competitor who could fight back," said David Mitchell, senior vice president for IT research of British-based consultancy Ovum.
Google dominates the lucrative Internet-search business in the U.S. with a 56.3% market share, according to the latest report by Nielsen Online. Yahoo, with 17.7%, and Microsoft, with 13.8%, combined for a market share of 31.5% in December, Nielsen said.
Google's global share is even higher. Search is highly valuable because related advertisements can be better tailored to users' interests, increasing the likelihood they will be clicked on and generate revenue.
Microsoft executives acknowledged that Google dominates the search market, and said a partnership with Yahoo would create a stronger rival.
Reports of Microsoft's on-again, off-again interest in buying Yahoo have swirled since early last year. A particularly deep-pocketed company, Microsoft has made clear its intention to spend heavily to bolster its online services business, which is relatively small compared to its software businesses such as Windows and Office.
Still, Yahoo's price tag would not be insignificant. Microsoft reported a total of cash and short term investments of $21.1 billion as of Dec. 31, according to regulatory filings. Should Yahoo accept the offer including $22.3 billion in cash, Microsoft may have to seek additional financing.
Building a network
Microsoft's bid for Yahoo is a radical departure from its traditional strategy of building its businesses from within. The $44.6 billion offer dwarfs the $6 billion paid last year for online advertising company aQuantive, Microsoft's largest purchase so far.
Doug Cogen, an attorney with the mergers and acquisitions group at Fenwick & West in San Francisco, said Microsoft has "become what they are largely without acquisitions, it's never been their culture or strategic approach. It's eye-opening when you think the aQuantive deal was by far their biggest to date, and this is about seven times bigger."
The bid underlines the importance of the online advertising market to Microsoft, which company executives say could double to $80 billion within three years.
In addition to search advertising, a combined Microsoft and Yahoo would also present a stronger competitor to Google in market of advertising networks that extend beyond the companies' own Web sites.
Google on Thursday disclosed some recent difficulty in its network, saying that it has struggled to present advertisements on social networking sites such as partner MySpace.com that attract active user interest.
Microsoft has been investing in its own network, while Yahoo has also made strengthening its network a priority. Yahoo's network partners include eBay Inc., though the company has struggled to further build its scale.
In June, Yahoo saw a management shakeup, with company co-founder Jerry Yang taking over as chief executive. Yang announced that the company would then undertake a broad reorganization to reinvigorate growth.
United States software giant Microsoft has launched an unsolicited bid to buy Internet search giant Yahoo! for US$44 billion or approximately US$31 per share.

The deal, which is half in cash and half in stock, if accepted by Yahoo!'s shareholders, could create a major competitor to Google, the search giant which currently dominates the Internet search market.