Microsoft WILL pay up for Yahoo!

Microsoft allegedly bid for Yahoo! last year for $40. Although never confirmed by the various parties, but the leak-the-news network pretty much had it in tow. Otherwise, why would Yahoo! reject $31 per share offer, a good 60% higher than its recent stock market price of $19.18? Because Yahoo! knows full well that Microsoft needs Yahoo! very, very badly.

On its own merits, Yahoo! is a broken story. Momentum is gone and senior management is adequate at best. Investors know it, too. At each turn, Google is knocking the heck out of Yahoo! and Microsoft as well. Microsoft knows it cannot build it, it must be acquired. No other viable option. Period.

Yahoo!, however, for a broken story is sitting in the cat bird seat--at least for the moment. The smoke screen of combining with AOL or partnering up with Google are neither an acceptable option nor a long term viable strategy. The stakes in the search engine/digital advertising/marketing game are enormous. Let's put this into perspective. In less than ten years of existence and less than four years as a public company, Google is on track to achieve $16-17 billion of revenues this year. No other company in American corporate history has achieved this kind of hyper-growth. Take a minimum of 30% growth for the next five years and Google's revenues will be at a staggering $55-60 billion. The profitability is also at a stunning rate of 35% plus.

Microsoft will swallow its pride and some of its own current market cap and pay up for Yahoo!. Microsoft began this movie and now they must finish it. In the meantime, Yahoo! personnel are and will continue to be distracted and as I wrote before, Google can pick up even more market share these next 18 months before Microsoft has a clear strategy with the eventual Yahoo! acquisition.