The offer, contained in a letter to Yahoo’s board, is 62% above Yahoo’s closing share price on Thursday.

Yahoo cut its revenue forecasts earlier this week and said it would have to spend an additional $300m this year trying to revive the company.

It has been struggling in recent years to compete with Google, which has also been a competitor to Microsoft.

“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.

Chairman quit
There has not yet been any comment from Yahoo.

Its chief executive, Jerry Yang, announced on Tuesday that he intended to lay off 1,000 staff as part of a restructuring plan.

Terry Semel, who stepped down as chief executive last June, also quit as non-executive chairman on Thursday.

Microsoft said that Yahoo shareholders could choose to receive either cash or shares.

Yahoo shares have fallen 46% since reaching a year-high of $34.08 in October. They rose 54% in pre-market trading.

“Ultimately this corporate marriage was forced by the rise of Google, which has grown into a serious competitor for both Microsoft as a software company and Yahoo as an internet portal,” said Tim Weber, business editor of the BBC News website.

“It is a shotgun marriage, but the person holding the shotgun is Google.”

‘Exorbitant premium’
According to its letter to Yahoo, Microsoft attempted to enter talks about a deal a year ago, but was rebuffed because Yahoo was confident about the “potential upside” presented by the reorganisation and operational activities that were being put in place at the time.

“A year has gone by, and the competitive situation has not improved,” Microsoft’s letter said.

But there has been some concern about the price that Microsoft is offering.

“To me, the premium seems exorbitant, for what is a dwindling business,” said Tim Smalls from the brokerage firm Execution LLC.

“I personally don’t see how the synergies of Microsoft-Yahoo is going to take on Google.”

Other analysts were more enthusiastic about the offer.

“It is a fantastic offer. It is game on,” said Colin Gillis from Canaccord Adams.

“This consolidates the marketplace down to Google versus Microsoft. These two companies will be going head to head.”

Original URL: http://news.bbc.co.uk/1/hi/business/7222114.stm

The move could give maturing Microsoft more access to young users and let Facebook get closer to a major software maker at a time when its growth is increasingly tied to a proliferation of small applications from independent developers on its site.

Citing people familiar with the matter, the Journal said the world’s largest software company sought to buy a stake of up to 5 percent in Facebook for $300 million to $500 million.

Facebook, led by its 23-year-old founder and Chief Executive Mark Zuckerberg, may insist on a valuation as high as $15 billion and is considering raising up to $500 million in cash to expand its operations, according to the Journal.

Such a deal could help Microsoft better compete against Web search leader Google Inc for a growing base of online advertising and put one of the Internet’s hottest names in Microsoft’s camp.

Facebook, which already has an advertising deal with Microsoft, would benefit from closer ties with developers as it seeks to turn its site into a full-fledged Web platform where users can play games, interact and read news about each other, said Forrester analyst Charlene Li.

“If you are building a business around building a platform there is one company that has done it better than anybody else — and that is Microsoft,” she said. “People have been just assuming that Google would be the best partner and that is not necessarily the case.”

Google has also expressed an interest in investing in Facebook, the Journal report said.

“It would probably be pretty good for Microsoft since it has not had the best success in creating really hip, young-people-grabbing stuff on the Web,” said Kim Caughey, a senior analyst at Fort Pitt Capital Group, which oversees more than $1 billion, including Microsoft shares, for clients.

Representatives for Microsoft and Facebook declined to comment.

Zuckerberg has repeatedly said his company wants to remain independent and is seen as preparing to float itself on the stock market eventually.

Facebook has grown to 39 million members, up nearly 63 percent from 24 million in late May, and is quickly gaining ground on larger rival MySpace, which was taken over by News Corp in 2005 for what is now seen as a bargain price of $580 million. MySpace has more than 200 million users.

Facebook’s explosion popularity has also drawn increased scrutiny, including a 50-state investigation into the company by attorneys general concerned about Web sexual predators.

New York Attorney General Andrew Cuomo said on Monday his office had subpoenaed Facebook and accused it of not keeping young users safe. Facebook said it was preparing a statement about the issue.

Redmond, Washington-based Microsoft already has an exclusive agreement until 2011 to broker display advertisements for Facebook. The Journal said Microsoft and Facebook are discussing expanding that agreement beyond the United States.

After relinquishing an early advantage in the lucrative paid search market to Google and Yahoo Inc, Microsoft is trying to catch up by clinching deals to broker display advertising to some of the leading names in “Web 2.0.”

Yahoo and Google are also maneuvering. Earlier this year, for instance, News Corp chief Rupert Murdoch said he had discussed swapping MySpace for a 25 percent stake in Yahoo.

Web 2.0 is a catch-phrase for a new generation of Internet services that run on interactive software and typically rely on content generated by users to attract more visitors. Microsoft also has an agreement with popular news site Digg.com.

Microsoft shares rose 1.5 percent to $29.08 on Nasdaq.

Original URL: http://news.yahoo.com/s/nm/20070924/wr_nm/microsoft_facebook_dc