Microsoft's Alternative: Buy AOL and MySpace

Microsoft (MSFT) has a choice.

While the prevailing wisdom has been that the company has no alternatives to buying Yahoo (YHOO) if it wants to be competitive with Google (GOOG) in the online advertising market, it is certainly possible that they could spend their $40 billion or so someplace else.

Charles DiBona, an analyst at Bernstein Research, has an idea on that. He thinks the company could change the game, make a cash offer for AOL to Time Warner (TWX) - interrupting a reported deal for Yahoo to buy AOL - and then cut a deal to buy MySpace and other online assets from News Corp. (NWS). For one thing, he says, Time Warner is likely to be more inclined to take cash from Microsoft than stock from Yahoo. For another, he writes, Microsoft “could comfortably walk away from YHOO, secure that YHOO could not consolidate its way into a better competitive position.” The uncertainly attached to a regulatory review of a Yahoo deal to outsource search to Google, he adds, “could significantly impair Yahoo’s business in the interim regardless of the ultimate outcome.”

And meanwhile, he says, MSFT would have assembled a relatively substantial Internet presence with significant traffic at a much lower cost than the Yahoo deal. “This would give MSFT a better platform with which to compete with YHOO and try to beat rather than buy them,” he writes. DiBona says it would have the added of advantage of “including a poke at GOOG,” since AOL’s outsourcing deal to Google includes a change of control provision that would allow MSFT to capture that business.

DiBona laid out this scenario as one of four choices he sees for Microsoft. The others:

• Stay the course, give Yahoo the stated three weeks to respond, and then decide whether to launch a proxy fight, and if so at what price. He says this approach is not likely to lead to a near-term agreement, and instead results either in a proxy fight or MSFT walking away.
• Sweeten the bid, and offer a few bucks more a share. DiBona says the math on the deal works up to about $35 a share.
• Walk away. That approach would leave MSFT where it was, a distant third in the search business, while a combined Yahoo and AOL would strengthen its stance in display ads. “Strategically, that could be troublesome and it’s not even clear what tactical advantage MSFT would gain from simply walking at this point,” he writes.”

If I were a betting man, I would think a higher bid seems like the most likely scenario; DiBona’s alternative plan has appeal, but doesn’t get at the root issue of Microsoft’s weak share in search and search advertising. But you never know.

Comments

[Donald E.L. Johnson]

Why doesn't MSFT sell its search business and find a business that it knows how to grow? To date, it's shown it doesn't know how to beat Yahoo or GOOG, and there is no guarantee that it would let executives it bought with YHOO or AOL use their experience and skills to grow a MSFT-YHOO--?? business. Indeed, the YHOO and AOL executives don't have a bright record of executing their plans, either.

What would be better acquisitions for MSFT and its shareholders?

[Tom B]

Buy AOL? Eric, I love it! It's perfect. Beautiful. And then maybe Atari and Motorola. That'll show Google!

[steveballmer]

Whether or not it's wise is no longer the point, we must buy yahoo or lose face!