Microsoft and Yahoo!: Bring it on!

Posted May 4th 2007 1:02PM by Melly Alazraki
Filed under: Major Movement, Deals, Google (GOOG), Microsoft (MSFT), Yahoo! (YHOO)

By now it's almost old news. The New York Post reported today that Microsoft Corp. (NASDAQ: MSFT) asked Yahoo! Inc. (NASDAQ: YHOO) to re-enter formal negotiations. The deal could be worth around $50 billion according to sources. MSFT shares are down 1.3% to $30.57 and YHOO shares are up 18.8% to $33.47 around 11 this morning.

No doubt Microsoft is feeling the pressure from Google Inc. (NASDAQ: GOOG) with its commanding lead in search market share and online ad empire, not to mention Google's constant encroachment on Microsoft's software business with its own offering of web-based software. Yahoo! has been losing market share to Google as well. A partnership could allow many for and for different complementing services and technologies to be combined. The reasons need not be repeated. With Yahoo!'s market cap (as of yesterday's close) at $38 billion, does a $50 billion price make sense?

Let's look at the math: According to my calculation, $50 billion would amount to $36.8 per share. It would also mean about 51 times next year's estimated earnings and almost eight times 2008 projected sales. Is that too steep a price?

Many pundits suggest now that Microsoft should instead spin out Yahoo!-MSN into a company, mainly to keep its online focus and not create an even bigger company that may already be into many businesses. Microsoft's recent foray into the digital music player with the Zune still hasn't gained traction and it keeps competing with the likes of IBM on one hand, and Google and Yahoo! on the other. Yahoo!-MSN as a separate company could have many advantages in addition to focus, such as the ability to attract talent and have partnerships with Microsoft.

Finally, how would this affect Google? Should Google worry now that such a move looks more likely to happen? For now, Google is in pretty good position as the integration of the operations will take a while and could prove to be a difficult task. Indeed, Google stock, which has started a little down, is now pretty much flat.

Google may have been on the path to becoming an internet search monopoly, much like Microsoft is in the PC operating system. I don't know that any effort, combined or not, could catch up to Google, but competition has always been good to consumers and should be encouraged. If the alternative for a Microsoft / Yahoo merger is several companies giving up on online business, then I say, bring it on.

Tags: goog, msft, yhoo