Yahoo Inc. (NDAQ: YHOO) shares are up over 40 percent today after Microsoft Corporation (NDAQ: MSFT) revealed a $31 per share friendly takeover offer for the troubled web portal. The cash-or-stock proposal represents a 62% premium to the closing price of Yahoo shares yesterday - a compelling value by any financial measure. Microsoft believes that this combination would enable them to better capitalize on web and display advertising trends. Shareholders applauded the deal sending share substantially higher, but still left some room for opposition.

“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,” said Microsoft in their letter to Yahoo. “We would value the opportunity to further discuss with you how to optimize the integration of our respective businesses to create a leading global technology company with exceptional display and search advertising capabilities.”

The offer comes at an opportune time as Yahoo shares have been beaten down and many have lost faith in the company. Shareholders have been looking for an exit strategy that has clearly presented itself in the form of a cash-rich buyer like Microsoft. Meanwhile, employees have been looking for new direction and job security, and Microsoft has already promised “significant retention packages” to “engineers, key leaders and employees across all disciplines”. The offer is also a great deal for Microsoft as Yahoo shares are available at bargin basement prices!

A combined Microsoft and Yahoo would have revenues of $65 billion per year with net profits of around $17.6 billion per year and about 90,000 employees. Perhaps most importantly, it would command a 32.7% marketshare in the U.S. search industry. This is still behind Google’s 58.4% by a wide margin, but it does represent a substantial step in the right direction. Microsoft’s more organized culture, cash in the bank, and talented engineers may be just what Yahoo’s technologies need to get off the ground and compete.

In the end, there is still a lot of question as to whether this deal will even go through as planned. Yahoo’s Terry Semel stepped down from the board yesterday, presumably because of this deal taking place. Whether it was in protest or because he felt it was a “sure thing” remains to be seen, but many shareholders are also likely to oppose an acquisition at such historically low levels. However, many others are simply looking for an exit and may take up Microsoft stock to benefit from future growth. Regardless, this is definitely a situation worth watching!

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Yahoo Inc. (YHOO)