Microsoft shows $44Billion, eyes Yahoo, to take on Google

On the morning of a rare Google (GOOG) earnings miss, the world's largest software company, Microsoft (MSFT), is taking full advantage of the negativity and swinging its own news story. The Seattle company disclosed to the public that it has offered $31/share ($44Billion) to purchase Yahoo! (YHOO). This combined Microsoft Internet division would be a stronger second place competitor to Google's search and advertising dominance.

Google reportedly owns about 60% of search share and almost 70% of search advertising dollars, with competitors, mainly Yahoo and Microsoft, claiming the remaining scraps. Mind you those scraps, can amount to plenty in a business sector expected to expand from $40Billion to $80Billion in value in the coming years. The scope, breadth and quality of advertising is increasing on the Internet as its ease of use, ease of tracking, and ROI effectiveness become clearler to companies all over the world. While still a small piece of the overall advertising pie, the Internet provides the most complete customer profile available for any form of advertising.

Now this is a point of contention, the whole privacy issue, but the fact remains that most things on the Internet can be tracked, and the more advertisers and advertising platforms know about their users, the more effective the ads can be. Google knows this very well, hence their dominant position! Microsoft and Yahoo know this as well but they've failed to make any strides on their own. Perhaps the combined division can put a dent in Google's cash-hording fortress. (At last check Google as a business is still extremely young and has almost $20Billion in the bank)

Let's hope the deal goes through, for Yahoo investors sake anyway. The stock has been beaten up of late falling to its lowest level in several years at $18 and change per share. Microsoft's offer represents an over 60% premium from Yahoo's closing price yesterday. But before we tout this as the resurrgence of Microsoft's Internet division (A business line that is still bleeding losses year after year), lets expand on thier strategy and ambitions here.

First, its clear Microsoft wants to be in the Internet Advertising space, and be successful at it. It's the future of advertising and its extremely lucrative and high margin. Secondly, Yahoo's the only big player with a decent following and even a shot at dethroning Google. It makes sense right, to just combine 2nd and 3rd place, and eventually maybe they'll cause a stir. Unfortunately the gold medalist here right now is the behemoth known as Google. And unless Google's been mysteriously taking Human Growth Hormone they wont topple themselves off the podium anytime soon.

There's plenty of problems I see with this deal, and not even first on my list is the sheer smell of desperation on Microsoft's part to completely over pay to get this deal done. Yes it's true, they tried to talk to Yahoo a year ago and were told to go home. So they came back, with thicker pockets and the attitude of "No, is unacceptable". Granted this deal would still have to pass through all sorts of regulatory hurdles but that shouldn't cause too much of a delay. The biggest problem is SYNERGY. I would imagine lots of Yahooligans are going to be out of work, unfortunately. Do you think corporate cultures easily come together. Not a chance. It takes long, hard work to make even the simpliest teams fit together, let alone putting a company like Yahoo, with over 11,000 employees, inside of Microsoft.

Interestingly enough, it wasn't too long ago that Microsoft head Steve Balmer was talking up a storm on how Microsoft's strategy will be to make smaller niche acquitions and develope integrated web services and all that jazz. Now it seems this is a complete shift in the opposite direction. The thing you know about Microsoft though, is that when they smell blood, and trust me, Yahoo is bleeding mercilessly, they go for the kill. In the end Yahoo shareholders must be smiling because they have just been bailed out of a 50% decline in their company stock.

Now there's been big time deals that have completely blown up when firms weren't in the same industry. AOL-Time Warner come to mind perhaps? But even within the same industry, it doesn't always work. Diamler-Chrysler? Can you say disaster? Now I'm optimistic that if Yahoo accepts, and it most likely will, there will be better times ahead for both companies in the Internet space. Micrsoft's platform for advertising has failed to excite anyone, and Yahoo's Panama Ad Center was seen to be its saviour once. Perhaps together they can work out the kinks and actually leverage all those millions of unused hotmail and yahoo mail accounts. Yahoo still is a giant Internet portal with lots of user traffic, and with that comes great potential. The key is Clear Focus and Strategy and perhaps that's something that Microsoft can bring to the table for a scrambling Yahoo and its convulated Internet vision. How long this will take to integrate and fulfill? Not even the experts know that, but trust me, it will not be soon.

On the upside, we know Microsoft is loaded and extremely patient when it comes to new initiatives. They can lose money for years to try and make a footprint. Let's just hope for Microsoft shareholders, that this isn't looked back on in history as a major stumble in its quest for the Internet. Microsoft's Ad platform has a long way to go but perhaps with Yahoo's profitable help they can get on track and mount a serious offensive on the next phase of the Internet business.

Disclosure: Author is long GOOG