Microsoft-Yahoo: so what’s new?

May 4, 2007, 7:27 PM UTC
Fortune

At first glance, there’s not much new about today’s report in the New York Post that Microsoft (MSFT) has formally re-approached Yahoo (YHOO) about a merger. The article reads like banker talk: Investment bankers on one side or the other (or, better, a banker who couldn’t get a seat at the table) chatting up a deal to get things moving. It’s also not new news. A desperation merger between the two weaker online advertising players has been in the rumor mill for more than a year. Tim Arango and I speculated on such a move (among others) last October, for example, and UBS analyst Ben Schacter has justified a bullish call on Yahoo’s stock for quite a while predicated on Microsoft buying Yahoo if it got too cheap.

Does a deal make sense? Absolutely. Yahoo effectively could become MSN on steroids. The two search-advertising also-rans finally would be able to push serious traffic through their ad-search delivery platforms. Microsoft would bring major financial resources to Yahoo, which because of its underperformance in search has been cost-cutting elsewhere. (An Internet business cost-cutting during an advertising boom is a sad thing to see.) A tie-up also might explain why Yahoo CEO Terry Semel is still around. Everyone assumed he’d be gone by now. But Semel is a dealmaker, and this is an enormous deal.

Having said that, every time I’ve discussed a Microsoft-Yahoo merger with people who know the two companies well, they remark on what a disaster it would be. Those ad-search platforms, for example: each company has spent a fortune developing their own. It’d be a bitter pill to ditch one. Microsoft remains light years behind in truly understanding the Internet, at least compared with Google’s mastery. Google (GOOG) would love this deal, at least for a couple years, in the same way Dell (DELL) was ecstatic when HP (HPQ) bought Compaq. (Dell squandered an opportunity by not taking that deal seriously enough, but I digress.)

The market, of course, takes this report extremely seriously. Investors don’t care if a banker is trying to pump up a deal or if this talk is old or new. Yahoo’s stock was up 19% by late morning. Like the response to News Corp.’s (NWS) bid for Dow Jones (DJ) , the market’s reaction might make this deal a reality.