A global war for dominance on the internet has just erupted.

Seeking to directly confront Google, Microsoft has made an unsolicited offer to buy Yahoo, the struggling search giant, for $44.6 billion.

On a conference call this morning, Steve Ballmer, Microsoft's chief executive, said that the deal would mark "the next major milestone in Microsoft's companywide transformation to embrace online services overall."  

It would be the largest technology deal ever. It is also something of a departure for Microsoft, which has previously shied from making big acquisitions. Its largest was a $6 billion deal for Aquantive last year.

Still, as Mark Mahaney, an analyst with Citigroup, said in a note, "For Microsoft or any other company seeking to gain scale in Internet advertising, Yahoo is an obvious strategic choice."

As Kevin Johnson, Microsoft's president of platform and services, said on the conference call this morning, "Scale matters" in online advertising.
 
The offer, half cash and half stock, represents a premium of 62 percent over Yahoo's closing stock price on Thursday.

In a statement, Yahoo said its board "will valuate this proposal carefully and promptly in the context of Yahoo's strategic plans."
 
Given Yahoo's battered stock price and its warning on Tuesday that it faced "headwinds" as spending on online advertising slows, the bid appears to be a sure-fire knock-out punch.

Henry Blodget on the Silicon Alley Insider blog says, "By going public with the offer, Microsoft is seeking to 'pull a Murdoch'—going over the heads of Yahoo's management team straight to independent shareholders, in the hopes that the shareholders will force management to sell. This is the same play Murdoch used so brilliantly to swipe Dow Jones from the Bancroft family."

Ballmer said that he called Jerry Yang, the C.E.O. of Yahoo, about the offer on Thursday night, but he did not say what Yang’s immediate response was.  

The approach from Microsoft now appears friendly, but as the New York Times' DealBook notes, Microsoft has other options if Yahoo puts up resistances. Microsoft could put up a slate of directors to run for Yahoo's board. All of Yahoo's directors come up for election at the same time.

There are sure to be antitrust issues. A deal would combine the largest software company with the largest Web portal.

A major hurdle to a deal may come in Europe, where regulators have long been critical at what they see as Microsoft unfairly leveraging its dominance in operating software.

There has long been speculation that Microsoft might acquire Yahoo to take on Google. In Microsoft's letter to the board, it said that it approached Yahoo over a possible alliance in late 2006 and early 2007.

And Microsoft made clear who it had in its headlights, noting that in online advertising, "the market is increasingly dominated by one player who is consolidating its dominance through acquisition.

"Together, Microsoft and Yahoo can offer a credible alternative for consumers, advertisers, and publishers."

Shares of Yahoo jumped 43 percent, to $27.58.  Microsoft shares fell 6 percent, while Google shares tumbled 9 percent.

Will there be a higher bid?  Rob Cox and Jeff Segal on Breakingviews.com argue that Yahoo's board should not capitulate immediately. "While the headline numbers look nutty, once stripped of its cash and Asian investments, Yahoo looks more reasonable."

But there is unlikely to be another bidder, says Henry Blodget on Silicon Valley Insider. No media company can afford to go mano-a-mano with Microsoft. Google can, but it is unlikely to want to further antagonize media companies and regulators.

Valleywag notes that Yahoo has recently hired a number of executives from Microsoft, hinting at a possible Fifth Column of sorts inside Yahoo.

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