Microsoft has offered to buy the search engine company Yahoo for $44.6bn (£22.4bn) in cash and shares.
The offer is 62% above Yahoo's closing share price on Thursday.
“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,” said Steve Ballmer, chief executive officer of Microsoft.
“Our lives, our businesses, and even our society have been progressively transformed by the Web, and Yahoo! has played a pioneering role by building compelling, high-scale services and infrastructure,” said Ray Ozzie, chief software architect at Microsoft.
Microsoft expects to cut costs by $1 billion a year by realizing synergies with Yahoo in four areas: obtaining economies of scale as its audience increases; combining its research and development efforts with Yahoo's to innovate faster; eliminating operational redundancy to cut costs, and pooling expertise to innovate in video and mobile.
The companies will work together to develop the merger plan, Microsoft said.
It intends to pay key Yahoo engineers and other staff to stay following the merger.
The bid comes hours after Yahoo announced that Terry Semel was stepping down as non-executive chairman, six months after handing over his CEO title to Jerry Yang.
Semel is leaving the board effective immediately, Yahoo announced yesterday. He will be replaced as non-executive chairman by another board member, Roy Bostock, the company said.
Semel was chairman and CEO of Yahoo for six years until he was replaced in a management shuffle last June. Yang, one of Yahoo's co-founders, was made CEO, and Semel was demoted to non-executive chairman.
As CEO, Semel helped to build Yahoo's audience from 170 million to more than 500 million users. But he was also blamed for missteps that allowed Google to build a commanding lead in online search and advertising, prompting last year's reorganisation.
"With the Company moving forward under new leadership, I believe this is an appropriate time for me to step down from the board," Semel said in the statement.
He approached the board several months ago about leaving once a replacement could be found, Yahoo said.
Bostock has a long history in the advertising industry, "an area that is more important than ever to Yahoo's business and our long term success," the company said.
This week Yahoo reported that net income for its fourth quarter declined to $206 million, from $269 million a year earlier. It also announced plans to lay off about 1,000 staff.