Yahoo! has yet to respond to Microsoft’s hostile takeover bid. Photo courtesy of Yahoo!.

Following Microsoft’s hostile takeover bid for Yahoo! on 1 February, Google has stepped in with a proposal of a partnership between the two internet sites.

Yahoo! is now thought to be considering an alliance with its once bitter rival in an attempt to fend off Microsoft’s unsolicited $44.6 billion (£22.5bn) takeover bid.

Microsoft’s letter to Yahoo!’s Board of Directors last Friday proposed to acquire all the outstanding shares of Yahoo! common stock for per share consideration of $31, representing a 62% premium above the closing price of Yahoo! common stock of $19.18 on 31 January, 2008.

“We have great respect for Yahoo!, and 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,” said Steve Ballmer, Chief Executive Officer of Microsoft.

He further added: “We think it’s a generous offer. We trust the Yahoo! board and shareholders will join with us quickly in moving down an integrated path.”

The rapidly growing global online advertising market is estimated at $42bn. Through a combination with Yahoo!, Microsoft would command about 30% of online searches in the US, giving it critical mass to make more of its advertising technology.

The tie-up would also create a powerful competitor to Google in mobile phone technology by combining Microsoft’s Windows Mobile operating system and Yahoo! applications such as the photo-sharing site Flickr.

However, according to American media, Google’s Chief Executive Eric Schmidt has been in contact with Yahoo!’s founder, Jerry Yang, to propose working together, but as yet Yahoo! has not publicly responded to Google’s approach and is yet to outline its response to Microsoft’s offer.

The intervention by Google heightens tension in the technology industry over Microsoft’s bid, which has driven a wedge through Silicon Valley.