Yahoo Deal Might Stymie Even Microsoft

By John Pallatto  |  Posted 2006-01-04 Print this article Print

Opinion: It could prove difficult for Microsoft to carry out a Yahoo buyout. But the competition with Google might give Microsoft the determination to overcome any and all obstacles to the deal.

At first glance it would seem to be out of character for Microsoft to spend many billions of dollars to buy out a company like Yahoo rather than continue with its dogged strategy of building up its MSN search portal to challenge the dominance of Google. But that doesnt mean that it wont happen, and that is exactly what the latest industry rumors claim. So far, there isnt much solid evidence that the two companies are talking. Investors have been snapping up call options for Yahoo stock, which means they are betting that Yahoo stock is going to rise during the next month.
It could be because rumors are percolating that Microsoft want to at least buy a piece of Yahoo or perhaps buy the entire company.
But investors could also be buying options just because they expect Yahoo to report strong quarterly sales and earnings this month. The Los Angeles Times on Jan. 1 went as far as to write that the flurry of speculation was because Yahoo had already refused a Microsoft buyout offer of $80 billion because it was too low. Click here to read Mary Jo Foleys commentary on why Googles $1 billion investment in America Online only aggravates its competitive feud with Microsoft. Neither company will comment. But if Microsoft had a formal unsolicited offer, Yahoos board would have had to make a formal reply, and government regulators as well the media would have gotten the word. Its more likely that that Microsoft has put out unofficial feelers to find out whether Yahoo would be amenable to a friendly partnership or merger. In that case, the two companies wouldnt be obligated to disclose their talks unless they reached an agreement. The working theory is that Microsoft is still determined to acquire at least a piece of a major Internet portal company, since Google outbid Microsoft to acquire a 5 percent share of America Online. Buying Yahoo would provide a quick way for Microsoft to increase its share of the rich Internet advertising market rather than to keep building up the audience share and advertising revenue of its MSN Web portal. Microsoft and Yahoo already have a relationship in place. In October, the two companies agreed to link their instant message systems to create what they say is the worlds largest IM community. That Microsoft might be willing to pay billions buy rather than build up its Web presence is more evidence of the maturation of the technology industry. Microsoft cant expect that it can sustain double-digit revenue growth based on the sale of operating systems and applications alone. It is a sign that Microsoft is prepared to become more of a media company and less of a technology company because that is where the growth and the competition are. Microsoft faces the challenge of either buying a Yahoo or conceding dominance of the Web advertising-search market to Google, and that is a condition its constitutionally unable to accept. It doesnt appear likely after years of trying that MSN will overtake Google or Yahoo as the top search portal on the Internet through organic growth. Next Page: Google envy.

John Pallatto John Pallatto is's Managing Editor News/West Coast. He directs eWEEK's news coverage in Silicon Valley and throughout the West Coast region. He has more than 35 years of experience as a professional journalist, which began as a report with the Hartford Courant daily newspaper in Connecticut. He was also a member of the founding staff of PC Week in March 1984. Pallatto was PC Week's West Coast bureau chief, a senior editor at Ziff Davis' Internet Computing magazine and the West Coast bureau chief at Internet World magazine.

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