Open Season on Dot-Com Stocks

Well, it was fun while it lasted. Friday's surge at Yahoo! (Nasdaq: YHOO  ) over published reports that Microsoft (Nasdaq: MSFT  ) might acquire the online portal is history. The Wall Street Journal now cites sources claiming the two companies are no longer actively negotiating a deal.

The combination would have made sense. It still does. However, now that the two bellwethers seem to have cooled on the notion of an outright combination, it's time to turn our attention to some of the smaller players in this space.

A peculiar trend was that many of the smaller interactive marketers and online content companies rose sharply on Friday.

	Fri. Gain
CNET (Nasdaq: CNET  )	6.0%
ValueClick (Nasdaq: VCLK  )	2.3%
aQuantive (Nasdaq: AQNT  )	0.4%

What's that? You don't agree with me? You think that sector consolidation begets more of the same and that the gains made sense? Normally I would agree with you. Not this time. With Google (Nasdaq: GOOG  ) unhinging its jaws to begin swallowing down DoubleClick, who would be left to consume these companies at lofty premiums if Yahoo! hooks up with Mr. Softy? 

One stock got it right
The only trading that made sense on Friday was 24/7 Real Media (Nasdaq: TFSM  ) . Those shares sank 8.8%. Yes, there was an analyst downgrade -- based on valuation -- but that's just part of the story. The market realized that if Microsoft buys Yahoo!, the drawn out digestion process will make any other dot-com nibbles unlikely in the near term. 24/7 Real Media was rumored to be Microsoft buyout fodder a few days earlier.  

I realize that ValueClick, aQuantive, and 24/7 Real Media are great niche players in online advertising. I also respect CNET Networks as the top site when it comes to drawing in traffic with editorial content. In fact, CNET and aQuantive are two of my favorite Rule Breakers newsletter recommendation. However, if some of the recent gains are the result of takeover speculation, shouldn't they have dipped on Friday?

And just to make this even more timely, shouldn't those same stocks be going through the roof today? They're not. CNET, ValueClick, and aQuantive are all trading lower so far today.

Hear me out. If Microsoft and Yahoo! were at the negotiating table, it would seem to indicate two things:

• Microsoft is itching to buy.
• Yahoo! knows that it's in trouble if it goes it alone. 

These are two cash-rich companies, more desperate than any of the self-obsessed hotties on Wisteria Lane.

Google commanded 25% of the online advertising market last year, according to eMarketer. That is the exact-sized slice that Yahoo! and Microsoft combined to command in 2006. But eMarketer expects Google's reach to grow to 32.1% in 2007, relative to just 25.5% for its two largest rivals combined.

Microsoft needs to respond to Google's growing gut and the DoubleClick deal. Yahoo! needs to project a singing voice that is louder than just snapping up the Right Media exchange. True or falsetto?

The death knell for a deal between Microsoft and Yahoo! should be a dinner bell everywhere else. Now that March Madness is a distant springtime blur, the real game to play around the water cooler is to see which of the public Internet companies will go next.   

Yahoo! is a Motley Fool Stock Advisor newsletter selection. Microsoft is an Inside Value recommendation. CNET and aQuantive are picks in the Rule Breakers growth stock research service.  All three newsletters are currently beating the market, and you can find out why with free 30-day trial subscriptions.

Longtime Fool contributor Rick Munarriz isn't a fan of falsetto in music unless it's Mika these days or The Bee Gees a generation ago. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.