Primarily because of the pervasive Google (Nasdaq: GOOG ) presence felt through the online search world, the tie-up of Microsoft (Nasdaq: MSFT ) and Yahoo! (Nasdaq: YHOO ) almost has to happen.
As my Foolish colleague Rick Munarriz points out, there's no one else with enough heft that could pull this off without running afoul of the regulators. Baidu.com (Nasdaq: BIDU ) , perhaps the only other player that could make an offer, would almost assuredly raise a red flag if it did. Yet just because a "Microhoo" combination ought to happen, that doesn't mean it will. Nor does it mean a merger would be successful.
According to Microsoft, Google's market share in worldwide online page search has reached 75%. Even though a number of its other forays have failed to live up to expectations and promise, Google mostly gets search right. Although I appreciate IAC/InterActiveCorp's (Nasdaq: IACI ) Ask.com with its intuitive enhancements and even Time Warner's (NYSE: TWX ) revamped AOL site, if anyone wants to overthrow the king, it appears that Yahoo! and Microsoft might have a chance.
But not so fast! Microsoft's pursuit of Yahoo! won't do much to change things. Despite CEO Steve Ballmer's suggestion of $1 billion in "synergies" from the hookup, Yahoo!'s position is on the wane. Domestically, Yahoo! has been losing market share for years now. According to analytics firm Compete.com, Yahoo! held 28% of the domestic search market in August 2006. As of this past December, that 28% slice was down to 17%. Microsoft is buying a dying product. Even overseas, Yahoo! China is a distant third behind Baidu and Microsoft.
I'd venture that a "Microdu" venture would have better success at making inroads on Google's dominance than its pricey bid for Yahoo! will. Since Baidu commands less than a quarter of Yahoo!'s market value, a bid for it would preserve much of Microsoft's capital yet give it a worldwide position in a rapidly growing company within a market that has nearly doubled in size last year.
For Yahoo!, the deal is necessary, and I'd say investors would do well to take the money and run while they can, even if they're leaving a few dollars on the table in the scramble to get out.
So while the acquisition may happen, this may not be the best way to dethrone the king.
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