Feb. 1: Microhoo or Yacrosoft?

The web is beginning to buzz with speculation about a new entity that might emerge from a possible merger of Microsoft Corp and Yahoo Inc and what that could mean for the digital world.

The natter on the Net was sparked by Microsoft’s sudden and unsolicited offer today to buy Yahoo Inc for $44.6 billion in cash and stock in what could be the biggest Internet deal since the $182 billion AOL buyout of Time Warner in 2001.

Microsoft’s boldest-ever acquisition move also raised the prospect of a grand slugfest with Google, the world’s biggest web search engine which threatens to grab large swathes of the new digital territory, including mobile phones through its Android platform.

The high-stakes battle between Microsoft and Google is expected to define the technology landscape for years to come.

If consummated, the acquisition would redraw the competitive landscape in Internet consumer services, where both Microsoft and Yahoo have struggled to compete with Google.

Microsoft, the world’s largest software company, said it offered $31 per share for Yahoo, or a 62 per cent premium over the Internet media company’s closing stock price on Nasdaq on Thursday.

Yahoo, whose shares jumped to $30.75 in pre-market trading, said it would evaluate the bid. Microsoft shares, which have a market capitalisation of about $300 billion, fell 6 per cent to $30.78.

“We have great respect for Yahoo, and together we can offer an increasingly exciting set of solutions for consumers, publishers and advertisers while becoming better positioned to compete in the online services market,” Microsoft chief executive Steve Ballmer said in a statement.

Ballmer said that he called his Yahoo counterpart, Jerry Yang, on Thursday night to tell him that Microsoft intended to bid on the company, and that they had a substantive discussion. “I wouldn’t call it a courtesy call,” he said.

The timing of Microsoft’s bid could allow the company to mount a proxy contest for control of Yahoo’s board should it try to dismiss the offer.

In a letter to the acquisition target’s board, Ballmer wrote: “Depending on the nature of your response, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo’s shareholders are provided with the opportunity to realise the value inherent in our proposal.”

Speculation over a Microsoft move on Yahoo has swirled for at least a year, as investors wondered whether the two would seek a joint stand against an ever more powerful Google.

Google has grown faster than Microsoft in every quarter since 2004 when the search engine company came out with its initial public offering — a fact that rankles in Redmond, Microsoft’s headquarters.

Yahoo and Microsoft had explored the possibility of working together in early 2007. However, Yahoo — the second largest search engine with a market share of 16 per cent to Google’s 77 per cent — had rejected the idea. In recent months, Yahoo has struggled to develop a plan to turn around the company.

“Microsoft’s wanted to do things that could build up online business dramatically,” said Brendan Barnicle, analyst at Pacific Crest Securities.

“This is going to be a big bet for them. But I also think it’s where they see the market going, so they really needed to get there. This is more than a shot across the bow at Google, because you put these two guys together who are basically two and three in search and it makes them far more relevant,” he added.

Critics of a tie-up, however, have pointed out that Microsoft and Yahoo have very different corporate cultures and many overlapping businesses, from instant messaging to email and advertising, as well as news, travel and finance sites.

Yahoo attracts more than 500 million people monthly to a range of media sites, including Yahoo Mail, the world’s biggest e-mail service for consumers.

With inputs from New York Times News Service and agencies