Microsoft has offered to buy the search engine company Yahoo for $44.6bn (£22.4bn) in cash and shares.

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.

In a conference call, Microsoft' s Kevin Johnson said that the combination of the two companies would create an entity that could better compete with Google.

It is a shotgun marriage, but the person holding the shotgun is Google
Tim Weber, business editor, BBC News website

" Today the market [for online search and advertising] is increasingly dominated by one player," he said.

Yahoo confirmed that it has received an unsolicited offer and said that its board would evaluate the 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."

If Yahoo accepted the offer, competition authorities both in the US and the European Union would be likely to investigate the tie-up.

Yahoo 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' S FALLING PROFITS
Oct to Dec 2007 down 23%
July to Sept 2007 down 5%
April to June 2007 down 2%
Jan to March 2007 down 11%

Yahoo share price
Microsoft share price
Google share price

Yahoo shares have fallen 46% since reaching a year-high of $34.08 in October. On Friday they closed almost 48% higher.

Microsoft closed 6.6% lower while Google shares fell 8.6%.

" 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.

This smacks of desperation from Microsoft who have consistently failed to achieve a meaningful online presence

" 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."