Microsoft is in final talks to buy Danish enterprise software firm Navision for $1.2 billion.
Navision shares soared by 23 per cent as the company confirmed it was considering a possible "strategic transaction".
In a statement, the company, without naming Microsoft, said: "The board of directors of Navision has decided to investigate the merits of any such transaction".
A Microsoft spokeswoman declined to comment.
Many financial analysts have predicted consolidation in the European software industry. It has been badly hit by a sharp fall in demand. Smaller software groups have suffered more than their bigger rivals, as customers shift towards buying from larger, more financially stable, companies.
Microsoft is expected to accelerate its acquisitions in coming months. During the quarter ended March 31st, it generated $4 billion in free cash-flow and had $39 billion of cash and equivalents on its balance sheet.