Analysis: Microsoft-Yahoo -- not if, but when, analysts say

Reports that Microsoft and Yahoo are in talks over a possible acquisition or merger have come as anything but a surprise to analysts who question not if, but when, a deal will happen.

Microsoft and Yahoo, which have held informal merger talks in the past, are at the negotiating table again, driven largely by the rising dominance of Google in the online advertising market, The New York Post and The Wall Street Journal reported Friday.

Yahoo didn’t immediately reply to phone and e-mail requests for comment. A spokeswoman for Microsoft said the company doesn’t comment on rumors.

The possible early-stage negotiations over an acquisition, a merger or some other type of deal come on the heels of Google’s move last month to snatch up online advertising powerhouse DoubleClick for $3.1 billion.

Discussions between the companies are not news to analysts.

“The talks are real,” said Greg Sterling of Sterling Market Intelligence. In the wake of the Google-DoubleClick deal, both Microsoft and Yahoo need to do something “radical,” he said.

“An alliance wouldn’t satisfy the market,” Sterling said. “The market wants a ‘game-changing’ move. On paper, an acquisition looks good.”

Google is the enemy, and the sooner Microsoft and Yahoo respond to the Internet giant’s growing online presence, the better, according to Rob Enderle of Enderle Group.

“Both companies are struggling to compete with Google, which has become incredibly powerful in the Internet advertising space,” he said. “This is a competitive response to the amount of power that Google is collecting.”

Enderle noted that while “big deals like this could be tough,” he pointed out that “Yahoo’s numbers aren’t good and this could put pressure on the company’s executives to consider a deal.”

A move to hook up with Microsoft could also help Yahoo catch up to Google on the “perception” front, according to Jennifer Simpson, senior analyst with Yankee Group Research.

“Yahoo, although seen as a viable competitor to Google, is not at the top of many people’s minds anymore, in terms of being a competitor,” she said.

Most analysts see more advantages than disadvantages of a tie-up between Microsoft and Yahoo.

“What Yahoo has and Microsoft really doesn’t is a foothold in the Silicon Valley community, which is becoming increasingly important for acquisitions, development and getting the word out,” Simpson said. “This partnership would bring that to Microsoft.”

Microsoft also stands to benefit from Yahoo’s online expertise. “Microsoft is essentially a technology company that has been focused on its Windows and Office software products,” said Emily Riley, an analyst with JupiterResearch. “Yahoo is very different; it’s an Internet company through and through.”

But analysts are also quick to point out that a deal between the two companies could pose some huge challenges.

“Integrating the workforces, the different corporate cultures and technologies will not be easy,” said Sterling.

And then there’s the “size” issue, according to Simpson.

“There is a certain hesitancy already about Microsoft’s hold in the market, particularly in the software market,” said Simpson. “It certainly doesn't distinguish if it goes out and buys a large Internet property like Yahoo.”

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