Microsoft CEO Steve Ballmer believes Yahoo has not improved its competitiveness in the year since it proposed a merger and now believes the only alternative is to combine the companies in a deal worth $45 billion.

Both companies talked in late 2006 and early 2007 about ways to work together, through commercial partnerships and even a combination of the firms, to improve their competitive standing in the online market which has been dominated by Google, Ballmer wrote in a letter to Yahoo's board on Thursday, just before today's unsolicited bid.

While a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo! that we are proposing, he said.

Microsoft has offered Yahoo shareholders $31 per share, a price 62 percent higher than the stock's closing price yesterday.

Yahoo said in a statement today that it will carefully and promptly study Microsoft's offer.

According to Ballmer then Chairman and CEO Terry Semel rejected Microsoft's merger offer because of its Board's confidence in the potential upside if management successfully executed a strategy which included the introduction of Project Panama advertising platform and a significant organizational realignment.

A year has gone by, and the competitive situation has not improved, Ballmer wrote.

Citing the competitive threat by Google - but not mentioning the search leader by name - Ballmer said there would be benefits to a combination in terms of ad platform, costs for improving a search engine, and research and development.

Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition, he stated. In April of 2007, Google began the process of buying web advertising firm DoubleClick for $3.1 billion, a move which Microsoft has opposed, saying it would hurt competition.

Barely a month later, Microsoft said it would acquire ad company aQuantive for $6 billion in a move to expand its ad network.

Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers, and publishers, Ballmer wrote.

In the letter Ballmer says that apart, both firms lack the engineering scale necessary to make breakthroughs in research and development such as creating a single search index and single ad platform. He said Microsoft would offer Yahoo's engineers and other leaders at the company significant retention packages to keep the aboard.

We are prepared to deliver a draft merger agreement to you and begin discussions immediately, he said.

Steve Ballmer Microsoft Yahoo Google