Microsoft makes £22.4bn bid to take over internet giant Yahoo

Microsoft is planning to challenge the dominance of Google with a £22billion buy-out of rival internet search engine Yahoo.

The company set up by Bill Gates has made an offer for Yahoo in what would be one of the biggest internet deals in history.

Microsoft chairman Bill Gates. The company's bid for Yahoo signals an attempt to grab a bigger chunk of business in online services

But the offer has led to further concerns about the growing power of Microsoft, which makes gross profits of about £20billion and has fought allegtions of anti-competitive behaviour in courts on both sides of the Atlantic.

Late last year it bought a £120million stake in the online networking sensation Facebook. Many fear that if the Yahoo deal does go through the company really will wield too much power.

Among the criticisms levelled at the company is that it deliberately locks customers into its products.

This has led to complaints that computers cannot be bought without a Microsoft operating system being pre-installed.

Many fear that if Microsoft gets hold of Yahoo it will be able to increase its influence over internet usage.

Currently Microsoft and Yahoo's search engines trail a long way behind Google - in America 56.3 per cent of searches are carried out through Google. Yahoo is in second place with 17.7 per cent and Microsoft follows with 13.8 per cent.

Google, founded by Sergey Brin, left, and Larry Page, right, faces an assault by Microsoft billionaire Bill Gates

Google's success has been based on the perception that its searches are wider and more relevant than rivals.

Microsoft say it wants to create 'credible alternative' to the domination of Google.

But if any deal is agreed it could be subject to heavy scrutiny by regulators on both sides of the Atlantic.

This is because, as well as both operating powerful search engines, Microsoft and Yahoo are players in the wider online advertising market.

Liberal Democrat culture spokesman Don Foster has called for UK competition authorities to look at the deal.

"Everybody should be concerned about the growing dominance of Microsoft in every aspect of our lives," he said.

"While they have done much good for us, we have to be incredibly careful that they don't become so dominant that innovation and creativity is stifled."

He urged the Competition Commission to look into the deal, if it was able to.

Yahoo's headquarters in Sunnyvale, in California's Silicon Valley

In the early days of the internet, Yahoo, founded by two U.S. students, was the most popular search engine.

The engines work by picking out key words from every internet page which can be accessed by its network. The contents of each page are analysed and categorised on an database.

When someone enters a query into a search engine it will search its index and come up with the best matches.

While it has been losing out in recent years to Google, it is still widely used for emailing and its news services.

The two Americans behind Yahoo are likely to pocket £2.2billion if the deal goes through.

Jerry Yang, 39 and David Filo, 41, started Yahoo as a website listing board while students at Stanford University in California in 1995.

Originally called Jerry's Guide to the World Wide Web, Yang and Filo changed soon switched to Yahoo, named after a race of brutes in the Jonathan Swift novel Gulliver's Travels.

The unexpected offer comes as Yahoo and Microsoft have fallen behind Google in the race to capture online advertising.

Internet advertising is a massive growth industry and there are predictions that the online market will double in size to around £40.2billion by 2010.

The potential deal is so big that it boosted shares on the FTSE 100 index yesterday,

A Microsoft spokesman said: 'Today this market is increasingly dominated by one player.

"Together, Microsoft and Yahoo can offer a competitive choice while better fulfilling the needs of customers and partners."