The call came on Thursday afternoon, Pacific time. From his office in Redmond, Washington, Steve Ballmer, chief executive of Microsoft, picked up his phone to tell Jerry Yang — the head of Yahoo! based further down the West Coast in Sunnyvale, California — that he had just launched a $45 billion (£23 billion) hostile takeover bid for the search engine.

The courtesy call was far from out of the blue. Almost a year to the day,Yahoo! had told Bill Gates, the co-founder of Microsoft, and Mr Ballmer that Yahoo! was not interested in a friendly tie-up with the computer giant.

Yahoo! had told the group that it was not for sale. But he had agreed to co-operate with Microsoft and develop a commercial relationship, in which the two could team up to fight their bigger internet rival Google.

Yahoo! had not kept its side of the bargain and the two Microsoft chiefs had become increasingly frustrated with Yahoo!’s lack of responsiveness. They were also more and more anxious about Google’s dominance.

To Mr Gates, Google represents the biggest threat to Microsoft’s business so far and a tie-up with Yahoo!, the second-biggest internet search engine, represented his best chance of fighting back.

Microsoft is desperate to expand its online business, which ranges from e-mail to internet advertising sales. Combined with Yahoo!, Microsoft reckons that it can compete in online advertising, which, it noted, “is increasingly dominated by one player”.

Tuesday evening proved to be the final straw for Microsoft. Yahoo! published yet another set of grim results, representing the eighth consecutive quarter of declining profits. It also announced 1,000 job cuts. The numbers provided more evidence for Mr Gates and Mr Ballmer that Yahoo!’s weakening business and shrinking market share were helping Google to widen its lead over Yahoo! and Microsoft.

This week the Microsoft board met several times before agreeing on the 62 per cent cash-and-shares premium to Thursday’s Yahoo! closing price and the timing of their approach. They agreed on Thursday to make their move.

While the bid now has the full backing of the Microsoft board, it is not thought that all the board directors were convinced of the terms at the beginning of the week. By the time that Mr Ballmer picked up the phone on Thursday afternoon, however, he had the full support of the board and had fully funded the $22 billion cash element of the deal.

Microsoft knows Yahoo! as well as it knows itself. For the past year, the computer giant and its two advisers — Morgan Stanley, the American investment bank, and Blackstone, the private equity group — have been combing through Yahoo!’s accounts, analysing its strategy and scrutinising its management. All the while, Yahoo! was losing market share.

On Thursday evening, the Yahoo! board was — coincidentally — scheduled to meet, but after Mr Ballmer ended his call to Mr Yang, the agenda was very different from the discussion of cost-cutting and poor performance that had been planned.

In the following 12 hours, Mr Yang hurriedly sought to secure two investment banks to advise on a defence against the takeover. Shrewdly, Yahoo! appointed Goldman Sachs, the American investment bank that has in the past advised Microsoft, and Lehman Brothers.

Microsoft’s offer is only the opening shot. Although Yahoo! said yesterday, as part of its acknowledgement of the approach, that it would evaluate the proposal “promptly in the context of Yahoo!’s strategic plans”, it is believed that Mr Yang and Goldman Sachs will consider approaching another media group to fight off Microsoft. Disney, News Corporation — parent company of The Times — and AT&T were named as possible contenders.

However, after the letter from Microsoft to Yahoo! outlining its proposals was published yesterday, shares in Yahoo! jumped 45 per cent to $27.74 in lunchtime trading, still well below the cash-and-shares offer price of $31. The share price move indicated that, at least for now, Wall Street is not expecting a counter-move.

The deal is almost certainly too large for private equity players to contemplate and no trade buyer has the ready cash that Microsoft does. That makes Microsoft a formidable bid opponent for all but the most deep-pocketed of adversaries. Google is one of those, but Microsoft was suggesting yesterday that regulators would block any combination of its biggest rival and Yahoo!.

Shares in Yahoo! closed up by $9.20 at $28.38. Microsoft shares closed down $2.16 at $30.44. And after missing earnings targets late on Thursday Google slipped almost $48.40 to close at $515.90.

Men at the top of technology groups

Jerry Yang, 38, co-created what would become Yahoo! with David Filo in 1994, while studying electrical engineering at Stanford University, California. Yahoo! — meaning rude, unsophisticated — began as a web portal with a web directory. The pair devoted themselves to indexing their favourite links and posting them on a website. It is now one of the biggest internet brands in the world. Since the departure last year of the former chief executive Terry Semel, Mr Yang has served as chief executive and chairman. Previously, Mr Yang — seldom photographed without a smile — had acted as Yahoo's public face and served on its board of directors. Born in Taiwan, he came to California aged ten. He is now worth an estimated $2.2 billion.

Steven Ballmer, 51, the first manager hired by Bill Gates, joined Microsoft in 1980. They are thought to have agreed on a $50,000 salary and 7 per cent ownership of the business. Mr Ballmer is now worth an estimated $15 billion. Mr Ballmer, who knew Microsoft’s founder from their Harvard days, has headed several Microsoft divisions, including operations and sales. In 1998 he was made president, with day-to-day responsibility, and named chief executive. The son of a Ford manager, he is described in his Microsoft profile as “ebullient, focused, funny, passionate, sincere, hard-charging and dynamic”.

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