The software giant Microsoft made an offer as both companies struggle to catch Google. Yahoo shares jump 45%. Deal may face protracted negotiations, antitrust scrutiny. With Google getting  50%, Yahoo 17%, MSN 13% (approximately) of all search engine traffic you can imagine how strong microsoft search will be. Chances are very high that Microsoft will dominate the search engine marketplace in very near future; if the deal actually happens;

Microsoft stunned investors and Internet users around the world this morning by making an unsolicited $44.6 billion bid to buy rival Yahoo (YHOO, news, msgs).

The offer was made Jan 31, 2008 night and announced in the morning of Feb 1 2008. The $31-a-share offer is a 62% premium over Yahoo's closing price of $19.18 on Thursday. Yahoo shares soared on the news, jumping 45% to $27.72 by 12:20 p.m. ET.

Microsoft was down 6% to $30.51. It was the worst performer among the 30 stocks in the Dow Jones Industrial Average. (Microsoft is the publisher of MSN Money.)

The Dow was up 3 points to 12,653 at 12:30 p.m. The Nasdaq Composite Index was down 3 points to 2,386. The Standard & Poor's 500 Index was up 4 points to 1,383.

Financial stocks were leading the market overall.

The offer is clearly a bid by Microsoft to strengthen itself in its battle against Google (GOOG, news, msgs) in Internet search and related services. Google was down nearly 9% to $515.01 this morning after its earnings report Thursday night disappointed investors.

Year of talks

Microsoft's bid comes after more than a year of on-and-off talks between the two companies about a merger or some sort of business alliance. Microsoft CEO Steve Ballmer spoke with Yahoo CEO Jerry Yang about the offer late Thursday.

Microsoft's bid comes as Yahoo's stock price continues to struggle. Thursday's closing price represented a 56% decline from a high in January 2006.

Yahoo's only comment this morning was to acknowledge receipt of the offer. The company's board "will evaluate this 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," a company statement said.

The big jump in Yahoo's stock price signals that Wall Street believes a deal will happen. But the deal and it's timing are far from certain. Negotiations could drag out for months, and the combination stands to face significant regulatory hurdles from antitrust officials both in the United States and in Europe.

In fact, the U.S. Department said it was "interested" in reviewing antitrust issues associated with proposed deal.

Rival with Google

"Microsoft is under massive pressure to expand its Internet business to fend off competition from rivals such as Google, and this deal shows how desperate they are," Thomas Radinger, a fund manager at Pioneer Investments in Munich, Germany, told Bloomberg News. "It's a huge gamble, as the price is very steep, and it will take years to successfully integrate such a massive acquisition."

"Yahoo is vulnerable," Jordan Rohan, an analyst at RBC Capital Markets in New York, told Bloomberg. "Investors are losing patience with the Yahoo management team."

"We believe a deal would make strategic sense," Banc of America Securities analyst Brian Pitz wrote clients this morning. "Microsoft/Yahoo combination would be a more formidable competitor to Google, which has been winning the competitive battle with Microsoft in Online Services to date." But he was concerned about the antitrust issues.

Analysts were generally bullish on the deal. "It reflects the difficulties that Yahoo faces," Thomas Burnett, director of Wall Street Access, told MSN Money. "They're looking at a very powerful competitor - they're a No. 2 -- the stock is just going to trade in a $17-to-$22 area for a heck of a long time. There wasn't a very exciting future there."

A Microsoft-Yahoo combination would offer strong competition to Google, he added. "A lot of advertisers say they have to be on Google and throw a few crumbs at the other guys. If you have a combined Microsoft-Yahoo, you really have a serious alternative."

"One of the biggest challenges facing MSN and potentially Yahoo is the lack of scale in terms of search traffic compared to Google," JPMorgan analyst Imran Khan wrote this morning.

"We believe that a potential combination between the two companies could solve this issue and close the gap with Google from a search inventory and advertiser perspective."

Stronger online presence

Microsoft, like Yahoo, has faced an uphill battle against Google, and has invested heavily to build its own search engine and advertising technology. Last year, Microsoft spent $6 billion to acquire the online advertising specialist aQuantive. Microsoft's online services unit has been growing but remains unprofitable.

Analysts say Microsoft needs a strong footprint in the online space not just to grab advertising revenue, but as a way to deliver its core software offerings in the future.

Google has launched free online alternatives to Microsoft's spreadsheet and word processing software in recent months.