Microsoft is paying $6bn (£3bn) to buy digital marketing firm Aquantive in its biggest ever acquisition.
It is hoped the deal will strengthen Microsoft's internet business
The all-cash takeover will allow Microsoft to expand into the highly lucrative internet advertising market, that Google and Yahoo have targeted.
Aquantive advises agencies and website publishers on putting adverts online, connecting buyers and sellers.
The $66.50 per share offer is 85% higher than Aquantive's Thursday closing price of $35.87.
"This deal takes our advertising business to a new level," said Kevin Johnson, head of Microsoft's platforms and services division.
"We are committed to earn a bigger slice of the £40bn pie that's growing."
Microsoft is the latest technology firm to pounce on the shrinking independent online advertising sector.
Last month, search engine giant Google agreed to buy DoubleClick for $3.1bn, while Yahoo snatched the 80% of Right Media Exchange it did not already own for $680m.
Microsoft justified the expensive price tag - which represents 2% of its market value - by arguing the complementary technology of Aquantive was worth it.
But analysts are sceptical.
"There had to have been some desperation for Microsoft to pay the price that it did," said Morningstar analyst Toan Tran.
"Sometimes, I am worried that Microsoft has Google-tunnel vision. It's so worried what Google is doing that it becomes way too reactionary," he added.
Aquantive, which has about 2,600 employees, will continue to operate from Seattle as part of Microsoft's online operations.
It will help the software giant broaden the scope of services its MSN consumer internet unit can offer.
The deal is expected to be completed in the first half of 2008, subject to regulation.
Shares in Aquantive shot up 78% to $63.79 in Friday trading on the technology-dominated Nasdaq index, while Microsoft shares fell 0.5% to $30.83.