(CNN) -- Software giant Microsoft said Friday it had made an unsolicited offer to buy Internet search engine operator Yahoo with a cash and stock bid worth $44.6 billion.
Yahoo shares have lost around 30 percent of their value in the past year.
The $31-a-share offer represents a 62 percent premium for shareholders above the closing price of Yahoo stock on Thursday, Microsoft said in a statement.
Microsoft CEO Steve Ballmer said the move marked the "next major milestone for the Washington-based company.
The offer allows Yahoo shareholders to elect to receive cash or a fixed number of shares of Microsoft common stock with the total purchase consisting of half cash and half stock.
Yahoo shares rose nearly 60 percent in pre-market trading on news of the approach, while Microsoft shares were down 2.6 percent, CNN Money reported.
The announcement comes with Microsoft and Yahoo seeking to compete with Google in the lucrative online advertising market, currently worth $40 billion and expected to grow to $80 billion within three years. Watch CNN International Financial Editor Todd Benjamin's analysis of the offer »
"Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition," Microsoft said in its statement. "Together, Microsoft and Yahoo can offer a credible alternative for consumers, advertisers, and publishers."
"Google has been faster and smarter in realising what the Internet can do," CNN International's Financial Editor Todd Benjamin said. "Microsoft thinks Yahoo can help it leapfrog into this huge, huge market." Read Todd Benjamin's blog
Yahoo shares have lost around 30 percent of their value in the past year, while Google shares have gained, despite reporting a slowdown in fourth-quarter revenue growth.
"Microsoft's consistent belief has been that the combination of Microsoft and Yahoo! clearly represents the best way to deliver maximum value to our respective shareholders, as well as create a more efficient and competitive company that would provide greater value and service to our customers," Microsoft CEO Ballmer said in a letter to Yahoo's board of directors.
The letter also disclosed that Microsoft had approached Yahoo about a possible acquisition deal in February 2007 only to be rebuffed by Yahoo's board. "A year has gone by, and the competitive situation has not improved," the letter added.
Earlier this week, Yahoo announced plans to lay off 1,000 employees by mid-February, citing what CEO Jerry Yang described as "headwinds" facing the company. It also reported lower fourth-quarter earnings -- though still ahead of Wall Street's modest expectations for the firm. E-mail to a friend