Is Microsoft Really Through with Yahoo! ?

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Includes: AABA, GOOG, MSFT, NWS, TWX
by: Wayne Mulligan

So by now it’s old news that Microsoft (NASDAQ:MSFT) has completely called off its bid for Yahoo! (YHOO). After weeks of public battling between both of their PR departments, Ballmer finally raised the white flag and called it quits this weekend.

Yahoo!’s stock price promptly tanked by 15% on Monday, while Microsoft stock continues to tread water.

So the question becomes, where does Microsoft go from here?

In fact, that’s precisely what a reader asked this weekend:

Microsoft withdraws bid for Yahoo - who might they go after next?

In situations like this it always helps me to list the top realistic options and the pro’s and con’s for each. So what are Microsoft’s options?

AOL

Time Warner (NYSE:TWX) is likely going to spin this division out at some point in the near future, so they might as well get a bit of a premium for it if they can.

Pro’s:

  • Several high trafficked sites – reported a 15% increase in March traffic, reaching 55 million visitors across all of the AOL properties.
  • Diverse focus on editorial content and social media – remember, AOL recently acquired Bebo for $850 million not too long ago. This would give Microsoft a major presence in two large social networks.
  • AOL’s Platform A division gives Microsoft some great advertising platforms in the display ad business, which is exactly where Google (NASDAQ:GOOG) just planted its flag with its acquisition of DoubleClick.

Con’s:

  • For all of AOL’s traffic, it has yet to effectively monetize much of it.
  • Google is currently serving all of the company’s search ads. Could that add a layer of complexity to the deal? Would it make AOL less valuable if they no longer used Google?
  • Even with 55 million unique visitors, the company is still about half the size of Yahoo!. This might not be enough to give Microsoft the boost it’s looking for on the web.

MySpace.com

If you had asked me a few months ago I probably would’ve laughed at the idea of Microsoft buying the News Corp. (NASDAQ:NWS) owned MySpace. But after all of the Yahoo! shenanigans combined with the rumors of a joint Microsoft-News Corp. bid to buy Yahoo!, I think this might be a deal worth writing about.

Pro’s:

  • Fastest growing and largest social network in the world – it’s almost tied neck-and-neck with Yahoo! for the most highly trafficked site on the web.
  • The sector that it operates in is one of the hottest on the web right now and is attracting a ton of positive attention – something Microsoft desperately needs as it becomes an increasingly irrelevant participant in this space.
  • The deal would give Microsoft a dominant position in social network advertising as the company has already cemented its arrangement with Facebook via its $250 million investment in the company.

Con’s:

  • On the opposite side of the same coin, this deal could conflict with Microsoft’s Facebook investment – I can’t imagine “Zuck” would be too happy seeing one of Facebook’s largest shareholders in bed with its largest competitor.
  • Social networks have been proven to be notoriously difficult to monetize. Does Microsoft need to climb over 9 foot hurdles right now? Or should it be looking to walk over 1 foot hurdles?
  • This company won’t help Microsoft increase its share of the search market…social networks may be great, but search engines capture customer intent and that’s what makes the advertising space around it so valuable.

Facebook

Given that the company already has a major stake in Facebook, it’s not outlandish to think Ballmer wouldn’t pony up some more Microsoft money to buy the rest of it.

Pro’s:

  • The company already owns a piece of Facebook and serves its ads.
  • Like MySpace, Facebook is playing in an extremely attractive sector right now. An acquisition will certainly make Microsoft’s presence felt on the web again.
  • Facebook’s platform could be very compelling to Microsoft. Microsoft Windows effectively did the same thing for the desktop as Facebook has been doing for the web – giving developers an open set of API’s to develop, market and monetize applications on top of.

Con’s:

  • As with MySpace, Microsoft would run into monetization issues on this social network as well. Until they figure out a way to capture intent-to-purchase on a social network, it’ll never become as effective of an ad platform as search is.
  • Facebook, like MySpace, gives Microsoft no additional traction in the lucrative search engine advertising market.
  • Culture shock – even more so than Yahoo!, how would Facebook’s younger, less polished and less corporate employees mesh with the old guard at Redmond?

A Game of “Imagine If”…

Given that none of the options above seem extremely compelling, let’s play a little game of “imagine if”.

Imagine if Microsoft hasn’t really given up its desire to acquire Yahoo!.

Now, imagine if Microsoft were really smart and instead of walking away from the deal or overpaying, they decided to step away temporarily to manipulate the situation in their favor. Here’s what I mean…

Microsoft had to know that if they withdrew their bid that Yahoo’s stock price would crack – as it did on Monday. They’d also know that Yahoo! shareholders and executives would throw a fit – as they did on Monday. This would help Microsoft in a couple of ways:

  1. Now the company could scoop up shares on the cheap.
  2. They’d also have Yahoo! scrambling to put out any internal fires the whole situation might have caused. A distracted enemy is a weak enemy.
  3. It would give Microsoft time to court large Yahoo! shareholders – who are rumored to be less than pleased with their CEO – and build support for another bid.

Now this all might sound a little “conspiracy theory-ish”, but we’ve looked at the alternatives already. None of the other girls at this dance look quite as pretty as Yahoo! does and everybody knows it.

The Bottom Line

The bottom line is Microsoft wants a bigger presence on the web. They also need a bigger slice of the search advertising market if the company hopes to remain competitive with Google.

They don’t have many alternatives and Yahoo! is looking pretty desperate at this point as well. This half-baked “test”/partnership they have going with Google will NEVER make it through anti-trust, so that’s not even something worth considering.

My money is on a Microhoo! deal before the end of the quarter.