February 2, 2008 in Business

Microsoft-Yahoo merger tantalizing

Brian Bergstein Associated Press
Associated Press photo

A Times Square news ticker flashes a headline about Microsoft above a billboard for Yahoo last May.
(Full-size photo)

Microsoft’s offer at a glance

RICH OFFER: After two years of on-and-off talks and speculation, Microsoft offers to buy Yahoo for $31 per share, or $44.6 billion.

CLASHING TITANS: Microsoft wants to challenge Google’s dominance in the search-advertising industry. In recent years, Microsoft launched its own Web advertising platform and overhauled its search engine, but neither move helped close the gap with Google. Yahoo would bring in some much-needed search traffic and bulk up its display advertising business.

THE FRAY: Analysts say others might jump into the ring with competing bids for Yahoo – including News Corp., IAC/InterActiveCorp. or Google itself.

MARKET WATCH: Microsoft posted blockbuster earnings last week, while Yahoo forecast “strong headwinds.” Investors sent Yahoo’s stock up 45 percent Friday on the news; Microsoft’s stock sank 7 percent.

WHAT’S NEXT: Yahoo’s board says it will study the offer; then, it’s up to shareholders and regulators to approve.

BOSTON – A combination of Microsoft and Yahoo could reshape the Internet landscape for millions of Web users: Would the two companies join their online portals? Could they rethink the desktop computer to integrate Web content more directly?

The changes are potentially huge, but probably not in the short term.

Microsoft executives did not indicate Friday exactly what they would do with Yahoo’s brand if their $45 million bid is accepted. But analysts expect the combined companies to preserve many of their separate free services, like instant-messaging and e-mail programs.

A more likely medium-term change is that some of Microsoft’s Web content could fade away or get added to Yahoo, which has a vast collection of news and features aggregated from other providers.

Microsoft’s Web properties, including its Yahoo-like MSN portal, aren’t exactly slouches: They rank third, trailing only Yahoo and Google, in total visitors. But while Yahoo still is profitable, Microsoft’s online services are a consistent money loser. The MSN search engine is a laggard, even with recent efforts to soup it up under Microsoft’s online umbrella it calls “Live.”

Having Yahoo in its tent could give Microsoft a rationalization for abandoning its unprofitable online elements.

“I think MSN folds into Yahoo,” said Ian Campbell, CEO of Nucleus Research. “It would be foolish to keep that separate.”

Perhaps the biggest change Microsoft and Yahoo could achieve would be creating a better way to combine the Web and desktop computing – not to mention cell phones, TVs, cars and any gadgets that might plug into the Internet.

Consumers who access the Web on cell phones and handheld computers might be the first to find something new. Devices that run Microsoft’s Windows Mobile operating system could be better integrated with Yahoo content and possibly yield new services, like social networking functions.

New ideas will be key to compete with Google’s Web presence. After all, people don’t “Microsoft” or “Yahoo” anything. Microsoft in particular tends to be tolerated more than loved. Google is also leading development of an alternative cell-phone operating system it calls Android.

Eventually, a teamed-up Yahoo and Microsoft might be able to rethink the PC desktop – where Windows still runs 90 percent of the world’s PCs – so that Internet data such as stock prices, sports scores and weather are automatically baked in.

“We all have our home page because we have a concept of a home page,” Campbell said. Before long, “we may not have a home page – it might just be the background of my desktop. There’s no reason why Microsoft can’t push this to another level.”

Microsoft might also use Yahoo’s online strengths to galvanize Web-based versions of some of its powerful desktop software applications, like Word and Excel.

Open-source rivals and Google are threatening to bite into Microsoft’s lucrative Office software franchise with free versions of those kinds of “productivity” software. Microsoft is developing Web-based versions of its own, but slowly.

Now Yahoo could be the face through which Microsoft offers those online applications.

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