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Microsoft to Buy Yahoo

Microsoft and Yahoo Talk Merger.
Many recent talks have taken place between Microsoft and Yahoo on joining forces to better compete in the future versus Google. Microsoft is becoming frustrated with wall street's perception of MSN's lackluster performance in the booming online advertising market.

Microsoft and Yahoo discussed a possible merger that would pair their respective strengths and allow both companies to instantly promote a 30% stake of the online ad market. Many sources report the merger talks have ended, yet key insiders report that both companies are desperately trying to work together to change market perceptions.

Whatever the outcome, Microsoft's online division could be heading for a huge shake-up. Microsoft is frustrated by their lackluster results in the fight against Google in Internet search, the hottest advertising marketplace. Microsoft is firing top executives and pressuring staffers to work harder and faster in a rush to catch up to Google. Bill Gates and Steve Ballmer are frustrated that Microsoft lost out to Google earlier this year in the purchase of online-advertising specialist DoubleClick. The DoubleClick defeat has Microsoft Chief Executive Steve Ballmer considering new direction in keyword search. Ballmer called the MSN search division's performance "palpable". Mr. Ballmer is weighing many options including bringing in new management to the MSN online advertising group.

Microsoft is torn between shuffling their management deck from within or moving outside to form a partnership with Yahoo. The two companies have worked together before; Yahoo previously provided Microsoft with search technology and advertising. Microsoft broke off that relationship last year, as it phased in its own online-ad system within the MSN Live.com search project, which has yet to attract a critical mass of advertisers. The two companies also explored the idea of combining to form a greater competitor to Google a year ago, though those talks led nowhere.

For now, Yahoo does not seem interested in a major deal with Microsoft, say people familiar with the situation. The Sunnyvale, Calif., Internet company's course may largely depend on a new advertising-system upgrade, called "Project Panama," whose delay last year prompted criticisms from investors and others that were directed toward the company's management. Panama is now running, and Yahoo said recently that it expects the system to contribute to its revenue, starting this quarter. Also the Yahoo management team knows that if Microsoft takes over their days are numbered.

The merger could be a winner for both Microsoft and Yahoo. Microsoft has technical expertise that might benefit Yahoo, especially considering all of the defections from key Inktomi engineers. Under one possible scenario, Microsoft could manage the technical platform and infrastructure of the companies' combined Internet activities, while Yahoo's current staff could oversee the consumer parts of the businesses, such as Yahoo News, Finance and email. Yahoo is one of the world's most popular Web sites, attracting millions of consumers a day to services, which in turn attract advertisers. However Yahoo gave away their search leadership torch to Google in 2002.

While Yahoo is facing increased competition to sell advertisers the graphical-display ads, such as banners, that have been its bread and butter, the company recently has shown signs of momentum. Yahoo has signed partner sites to carry ads that it brokers, including 12 newspaper-publishing companies representing more than 264 newspapers, and the Web portal of Comcast Corp. Yahoo recently reported a $680 million deal to buy the 80% of online-ad exchange operator Right Media Inc. that it didn't already own.

If merger talks are revived, whether Microsoft and Yahoo could reach an agreement remains as much of a question as it did a year ago, when similar talks ended inconclusively. Microsoft has always steered clear of large acquisitions. Microsoft's market value is $42 billion.

Short of a wholesale merger, Microsoft could spin its online group into a separately run Yahoo in return for a Yahoo stake. Yet top Yahoo executives appear to be a big obstacle to any deal. Yahoo management feels they have found the right strategy and are wary of any combination with Microsoft, for whom Internet activities remain only a small part of its business, says one person familiar with the matter. Top Yahoo staffers could run for the hills if Microsoft acquires the company.

Any integration of the two companies' operations would also be a daunting prospect. Yahoo has in recent years faced criticism, including from within, that it has been slow and hasn't held executives responsible for poor performance. It revamped its corporate structure and shuffled executives in an apparent response and the Panama Project has been lackluster in performance to date.

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What a Microsoft-Yahoo Merger Means for Google.
If Microsoft and Yahoo merge Google may have to worry about its hold on the consumer search and online advertising markets. The potential Microsoft / Yahoo merger probably doesn't have rivals at Google shaking in their Gucci boots just yet, but if a merger comes to fruition Google may have to worry about its hold on the consumer search and online advertising markets.

Microsoft has started a new round of talks with Yahoo, though in the past Yahoo has consistently turned down any merger offers from Microsoft. The companies appear to be in new "early-stage discussions" over a merger or deal that would help both companies better compete for a larger share of the keyword search marketplace.

Microsoft officials are feeling somewhat threatened and frustrated by their lack of power and leverage in their battle with Google for dominance of the keyword searech medium. Microsoft is not the type of company that makes acquisitions right and left, and buying Yahoo would ease some of the pain of failing to take over DoubleClick and also give Microsoft 30% of the keyword search pie versus their current take of only 9%. Size in the advertising world does matter, though, and the combination of Microsoft Live Search and Yahoo! would encroach on Google territory in the search market. Will keyword searchers move over from Google to a new MSN/Yahoo joint search engine? Not unless and until Yahoo and MSN both make changes that:

1) Improve Search Quality.
2) Increase Results Page Delivery Speed.
3) Dramatically Improve Content Relevancy.
4) Expand The Size of the Databases.

Can a Microsoft-Yahoo joint venture truly compete against the precision, speed, accuracy and scale of the Google keyword search system?

No, not without a changing of the guard or a flex of the vista muscles in desktop search. To date Microsoft has not made up for arriving way too late to the search party and Yahoo got drunk early and handed the keys to the keyword search castle to the sober, focused, and most serious Google guys.

Yet even considering all of these search realities, both Microsoft and Yahoo still look much more prepared to truly compete together than all alone.