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Update 3 Microsoft has made a $44.6bn takeover bid for Yahoo!.

Microsoft is offering Yahoo! shareholders a mix of cash and stock under the unsolicited offer.

In his offer letter to the Yahoo! board yesterday, Microsoft CEO Steve Ballmer wrote: "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."

This will be partly achieved by "$1bn in annual synergy for the combined entity" Microsoft says, partly by scale, partly through combining engineering talent and cutting out redundant costs.

If the deal goes ahead it is likely to come under serious regulatory scrutiny, and Microsoft seems ready to plead Google's web ascendancy in mitigation.

"Today this market is increasingly dominated by one player. Together, Microsoft and Yahoo! can offer a competitive choice while better fulfilling the needs of customers and partners," Redmond's press statement said today. Warning regulators that "if we don't buy it, then Google will" is an interesting legal strategy, but is unlikely to win much support from competition regulators.

Ballmer's accompanying letter refers to a previous takeover offer made privately, from Microsoft in February 2007 which Yahoo!'s directors rejected. The reason given was that Yahoo! was confident in its ability to turn itself around.

Ballmer dryly notes: "A year has gone by, and the competitive situation has not improved." You can read it in full here.

When Microsoft last offered to buy the company, its shares were around the $30 mark. Since then they have been on the slide, despite a few rallies where they nudged $34.

Assuming that Microsoft offered a similarly generous bid premium last year the price then would have been well over $50bn.

But Yahoo!'s board of directors rejected that offer and instead bet the farm on Project Panama - Yahoo!'s delayed platform for distributing online ads.

By referring to this in the public letter Microsoft is making the latest proposed takeover hostile - the Yahoo! board is legally bound to do the best deal for their shareholders so it will be extremely difficult to reject a fully-priced takeover bid which is getting smaller by the year.

Much of the choicest bits of Yahoo! were bought in from outside rather than developed in-house. The company has been pretty busy in the last six months buying up ad exchange Right Media, mobile ad firm Actionality, sports site Rivals.com and Zimbra, the collaboration and email developer.

Back in 2005 Yahoo bought Flickr - the photo-sharing site which has gone from strength to strength and led to the closure of Yahoo's own picture service.

Microsoft’s previous biggest acquisition came last May when it bought online advertising company aQantive for $6bn.

On the face of it, the logistics of a merger are nightmarish, particularly given that Yahoo! has multiple integration projects of its own on the go. Add to that the certainty that the acquisition will wade through the regulatory process for months at the very least, and it seems that Google will have plenty of time to get its response ready, even if the deal does go ahead.

But given Yahoo!'s recent performance - with both profits and share price on the slide - it seems a fair bet that plenty of shareholders will be tempted by Microsoft's offer.®

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