Uh-Oh, Here Comes Microhoo Again

Let's party like it's 2008! Sources are telling Reuters that Microsoft (Nasdaq: MSFT  ) is considering a bid for Yahoo! (Nasdaq: YHOO  ) .

The key word there is "considering," because there is apparently disagreement within Mr. Softy's camp as to whether it should pursue an acquisition of its dot-com search partner. AllThingsD's Kara Swisher -- the best-connected tech blogger in Silicon Valley -- hears that a marriage of the two tech titans just isn't happening.

This will naturally bring back memories of 2008, when Microsoft offered $31 a share for Yahoo!, but was eventually shot down.

The argument against a buyout is that Yahoo! has been stagnant over the past few years, and Microsoft is better off chasing dot-com darlings. It's not as if Yahoo! would be growing under Microsoft's watch.

However, let's go over three important reasons for the world's largest software company to consider a play here.

1. Yahoo! would turn Microsoft into a nearly profitable Internet company
Despite Bing's success, Microsoft continues to lose money in cyberspace. It posted an operating loss of $2.6 billion in its online services division during its 2011 fiscal year, on a mere $2.5 billion in revenue.

One of the drains on its performance is a 10-year deal with Yahoo! where it provides the search technology and delivers ads to Yahoo!, but Yahoo! keeps 88% of the revenue. Observers generally agree that Microsoft got the better of the deal, but Yahoo! wouldn't have played along if Microsoft wasn't guaranteeing billions during the life of the deal. Why can't these billions belong to Microsoft? They can with a buyout.

2. Buying Yahoo! would keep it away from everyone else
It would probably be business as usual if Silver Lake or some other private equity firm gobbled up Yahoo!, but what if it's not. What if Baidu (Nasdaq: BIDU  ) -- or the publicly interested Alibaba -- buys in to establish a beachhead in English-language search? What if popular suitor understudy AOL (NYSE: AOL  ) buys in, creating a beast in display advertising that may feel its way back to search?

Google (Nasdaq: GOOG  ) wouldn't dare raise a bidding card. Regulators would laugh it away. However, it may very well influence a dark-horse acquirer to make a move just to be a thorn in rival Microsoft's side.

Even if an acquisition doesn't automatically signal the end of Microsoft's search pact, it will change things. A buyer will come in with new ideas, and it will be a shock if the acquirer doesn't want to take more control of its operations.

3. Yahoo! can be had for a lot less now
Obviously, it won't take a bid of $31 to walk away with Yahoo! this time around. The target is both injured and humbled. Speculators are bidding the stock into the midteens now on takeover speculation, but it's also this kind of run that will scare away the opportunists that were hoping to land Yahoo! at a great price.

Buying Yahoo! also won't be as expensive as it may seem. Yahoo!'s Asian investments in Alibaba and Yahoo! Japan are still valuable if the buyer wants to sell or spin them off.

Microsoft is one of the few companies with the cash on hand to make it happen. It would only have to convince shareholders that this is in Microsoft's best interest, and improving the bottom-line performance of its online services albatross would bear that out.

In the end, Microsoft may not want to buy Yahoo! -- but that doesn't mean that it won't.

If you want to follow the Yahoo! saga closely, add Yahoo! to My Watchlist.

The Motley Fool owns shares of Microsoft, Yahoo, and Google. Motley Fool newsletter services have recommended buying shares of Baidu, Microsoft, Yahoo, and Google. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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