The software and internet giant has bid $31 per share for Yahoo - a 62 per cent premium on Yahoo's closing share price on Thursday evening.
Steve Ballmer, the chief executive of Microsoft, said Microsoft has great respect for Yahoo and that, together, the companies can offer "an increasingly exciting set of solutions for consumers, publishers and advertisers while becoming better positioned to compete in the online services market".
Rumours have long circulated the industry about Microsoft taking over Yahoo. Last month, Yahoo revealed plans to cut 1,000 jobs after performing below expectations.
Last year, News Corp was rumoured to be proposing a tie-up with Yahoo, but Microsoft has become the first major corporation to openly launch a bid for the firm. Goldman Sachs is reported to be advising Microsoft on the proposed deal.