This isn't the first time that rumours of a possible deal has surrounded the two firms in recent years - reports last year claimed that the duo held informal merger talks.
But what might this mean and who would benefit?
Todays NASDAQ's figures suggest the news pleased the market. Yahoo's share price jumped 19% from $5.19 at opening to $33.37 within minutes of the news being released. A quick glance at Bloomberg also shows that this is the greatest jump Yahoo! has seen in 4 and a half years.
Interestingly, the news didn't do much for Microsoft's share price which were down slightly by 1.7% to $30.47. A little unexpected, perhaps?
Well ... perhaps not. Despite recent efforts to break into online advertising, Microsoft have struggled to make headway against the current search engine of choice, Google. Software remains Microsoft's biggest profit driver, and spending a huge $50billion to acquire a company in the area you're least experienced - not to mention least profitable - makes the city nervous.
Chris Cathcart, finance vertical strategist for bigmouthmedia said of the proposed deal:
"Recent years have not been kind to Yahoo!, and their growth has been slowing down. Last quarter, their revenue growth was 7% - the first time its been below 10% in five years. This deal will be good for both them and Microsoft as the deal will take Microsoft's online market share (in the US) from 12% to 38.5% in comparison to rival Google's' 48% market share."
Other commentators have expressed more caution over the deal because of the huge difference in the two companies cultures.
However, it's early days and it's yet to be seen if any deal is actually going to transpire - both Yahoo! and Microsoft so far have chosen not to comment.
Personally, we'd love to see it happen. Its been a long time that anything this exciting has happened in the search engine industry. Or almost any industry!
And its good to see Microsoft getting back to their tried, tested and above all infamous "If you can't beat 'em, buy 'em!" attitude.
