Microsoft Saves Yahoo!

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I don't think there's anything all that wrong at Yahoo! (Nasdaq: YHOO). Aside from having to play ugly stepsister to media fascinator Google (Nasdaq: GOOG), Yahoo! still produces great cash flow and owns a lot of hyper-valuable Web space.

That hasn't stopped Mr. Market from beating up the stock lately -- until today. Nothing like a rumor of old news becoming new again to add 20% to a stock. Today, the headlines are abuzz, parroting a New York Post scoop about the reopening of discussions that would have Microsoft (Nasdaq: MSFT) buy Yahoo!.

As much as I distrust giant acquisitions -- especially when it's my money at stake -- this Microsoft shareholder thinks such a hookup makes some sense. First of all, it would get Yahoo! access to some of the good tech that Microsoft has been developing, but failing to monetize. (Live search products, for those who haven't tried them, really are top-notch.)

In addition to those primo Web properties, a full hookup would give Microsoft a bigger base of Web searchers and advertising customers, something closer to the "critical mass" of users that allows for better cross-pollinating of search and ad sales. Yahoo! advertisers would benefit from the ability to get their foot in the door with the future ad possibilities that Microsoft will be able to offer in important spaces like online gaming and mobile devices. It would also allow tighter integration between the burgeoning media sites, both music and video, that both companies are developing separately.

Finally, it would provide a chance for Yahoo! to get rid of some of its flab, especially weird, go-nowhere content such as Capessa. To my mind, Yahoo's biggest problem has been not knowing what its business really was.

Any company buying Yahoo! could save substantial resources by realizing that no one goes there to see content it's creating. Users go there to see the content aggregated from its many partners. A tighter focus would be the best thing for Yahoo's bottom line, be it stand-alone or a portion of the Redmond giant. If the latest buyout rumors turn out to be true, you can bet there will be a lot more talk about what works at Yahoo!, and what can be safely discarded.

Yahoo! is a Motley Fool Stock Advisor newsletter selection. Microsoft is an Inside Value recommendation.

At the time of publication, Seth Jayson had shares of Microsoft, but held no positions in any other company mentioned here. See his latest blog commentary here. View his stock holdings and Fool profile here. Fool rules are here.