You may have fooled Mr. Market, Microsoft (NASDAQ:MSFT), but you can't fool me.

"Let me be clear," CEO Steve Ballmer said during yesterday's annual shareholder meeting. "We are done with all acquisition discussions with Yahoo."

Of course you are, Ballmer. And Windows Vista is a winner.

More than words
Mark my words: Microsoft will buy Yahoo! (NASDAQ:YHOO). By this time next year, Ballmer will be addressing many of the same shareholders with a new tale to tell.

"Let me be clear," he'll say. "We bought Yahoo! on our terms and at a great price."

It doesn't seem possible right now. Shares of Yahoo! fell 21% yesterday, mostly as a result of Ballmer's staged kiss-off. It's a trap, of course. If he really wants to buy Yahoo!, do you think he'd say so publicly? That would send Yahoo! shares higher, spoiling his chances of getting in at an attractive price. You don't want to be a noisy hunter. You'll scare off the prey.

Remember the original January offer to buy Yahoo! at $31 a share? It came just two days after Yahoo! posted lackluster quarterly results. Microsoft's style is to come in after the stink bomb drops. It planted one yesterday. It may have to wait longer than 48 hours to make its move this time, but it will.

If you follow the rules of engagement from this summer's busted buyout, Microsoft came on strong at $31, temporarily raised its offer to $33, and then retreated to a stance where it was interested only in Yahoo!'s search business.  

Even now, Yahoo! is still open to cut a deal for its search business. Here's a wild thought, Microsoft: Offer up what you think is a fair price for Yahoo!'s search business, but make that the price for all of Yahoo!. Surely Hotmail won't mind the nearly 300 million Yahoo! Mail accounts. I'm sure that a webcam maker like Microsoft can make good use of a still-shutterbug giant like Flickr.

Searching for more than search
Yahoo! isn't going to sell only its search business. It would be like plucking the six legs from an ant. Without search, Yahoo! doesn't move. What would be left? A meandering collection of display advertising networks and massive Web traffic that is hard to monetize? If Yahoo! wants to be Time Warner's (NYSE:TWX) AOL, it can buy its own fat suit. It doesn't need Microsoft to pick at the best part of Yahoo! and leave the rest behind as roadkill.

A naive shareholder asked Ballmer when Microsoft's best years would come. An honest Ballmer would have handed the investor a rearview mirror. Instead, Ballmer dismissed the question by suggesting that every year was a good year.

Microsoft shareholders who don't see the merit of snapping up Yahoo! -- at a fair price -- are deluding themselves as to where their company is organically heading.

Let's pull up an interim report card. Microsoft is cutting prices on its Microsoft Office software suite, Zune media players, Xbox 360 consoles, and security software. Windows Vista is being squeezed as an operating system by Apple (NASDAQ:AAPL) on the high end and Linux-flavored netbooks on the low end. It continues to post operating losses online, where Yahoo! may be a laggard but at least is consistently profitable.

Microsoft is going to have to buy a company or two to jump-start growth. It doesn't have to be Yahoo!, but why should it be anybody else?

The Big G burdern
Microsoft keeps running into Google (NASDAQ:GOOG) at all of the wrong parties.

  • Google Docs is a threat to Office.
  • Google Chrome is a threat to Internet Explorer.
  • Google Android is a threat to Windows Mobile.

These are all just juicy subplots to the real fight, which is essentially Google hogging up the most lucrative niche of cyberspace: paid search. As long as Google controls the advertisers, it controls the flow of money. Microsoft may be a force in software licensing and generating subscription revenue, but it wants more skin in the sponsorship game.

Microsoft wants to be a Web advertising force. Anyone who doubts that may want to look into the company's purchases of aQuantive and video game advertiser Massive.

Sure, Microsoft can keep nibbling that way. Companies like ValueClick (NASDAQ:VCLK) and Marchex (NASDAQ:MCHX) are attractively priced ways to acquire traffic, technology, and Rolodex padding. The real prize, though, is Yahoo!. It's the only way that Microsoft stands a chance against Google.

I see where Microsoft is going with its denials. It wants Yahoo! to be the one to make the first move. That could be a huge mistake. This is Microsoft's best chance to name its own price. If Yahoo! taps a dynamic outsider to lead Yahoo! -- and it can happen -- it's over for Microsoft. Once a new CEO starts dreaming out loud, investors will expect loftier buyout prices or be reluctant to cash out. Microsoft will have to resign itself to life in distant third place in cyberspace.

Microsoft doesn't want that. The clock is ticking, but it's ticking more for Microsoft than Yahoo! at this point.

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Longtime Fool contributor Rick Munarriz never takes "let me be clear" for a final answer. He does not own shares in any of the stocks in this story. He is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.