Yahoo, MSN 'Will Die'

Bloggers weigh in on the prospects for a deal and for success if it does take place. Skepticism abounds

Shares of Yahoo! (YHOO) surged on May 4 after reports that the Internet giant may merge with Microsoft (MSFT). The stock, which closed at $28.18 on May 3, soared 17% to more than $33 a share, before closing at $30.98. News that Microsoft has intensified its pursuit of Yahoo and requested the company to enter formal negotiations was first reported by the New York Post. Neither company has provided public comment.

Microsoft and Yahoo have discussed a combination or an alliance before, but the talks never advanced, in part because of personnel and cultural clashes. The two companies may have more common ground these days, however, particularly as Google (GOOG) has become steadily more powerful.

Google is taking market share from Yahoo in online search and in online revenues. Google has also begun to introduce software that competes directly with Microsoft, including its highly lucrative suite of word processing, spreadsheet, and other productivity programs (see BusinessWeek.com, 4/9/07, "Is Google Too Powerful?").

The new round of talks may have been sparked by Google's acquisition of DoubleClick. While Google has been dominant in the online advertising that accompanies search results, DoubleClick provides it with the technology to extend its business into display advertising and online video advertising (see BusinessWeek.com, 4/14/07, "Google's DoubleClick Strategic Move").

Pundits Weigh In

The deal would be the largest ever acquisition for Microsoft, but certainly manageable. Yahoo's market capitalization before the deal was announced was $38 billion, and the speculation is that the purchase price would be around $50 billion. Microsoft's market cap is nearly $300 billion and it had $28 billion in cash and short term instruments on its balance sheet as of Mar. 31.

Pundits on the Net quickly offered their opinions. There is plenty of skepticism about a merger because of the size of the deal, the differences in culture, the abundance of executive egos, and the redundancies in technology.

One of the severest critics is Henry Blodget, the one-time analyst at Merrill Lynch (ML), who now writes the Internet Outsider blog. "If Microsoft buys Yahoo, Microsoft should immediately spin the Yahoo-MSN business out as a separate company," he writes. "If it doesn't, both Yahoo and MSN will die."