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Industry buzzes over Microsoft’s pursuit of Yahoo

Microsoft Corp. is reportedly again pursuing the purchase of Internet giant Yahoo to better position itself against main rival and search leader Google. Search experts have mixed emotions about the situation.

Microsoft reportedly requested that Yahoo enter into formal negotiations for an acquisition that could be worth $50 billion. Yahoo’s market capitalization was about $40.5 billion on May 10.

“On paper, the deal makes sense,” said Charlene Li, principal analyst at Forrester Research, in a post on her blog. “But in the end it’s going to be so hard that I don’t think it will happen.”

The Wall Street Journal said executives of the two companies were looking at a merger or some other kind of synergy.

“I believe that a merger won’t be in the works anytime soon,” Ms. Li blogged. “More logical would be partnership agreements where the strengths of each company are shared. These tentative first steps to a merger would make a lot more sense, giving both companies the ability to ‘test the waters’ before jumping into the deep end.”

Microsoft is under pressure to compete with Google, which recently announced its bid for online display advertising company DoubleClick Inc. for $3.1 billion.

Microsoft is in third place in the Web search business, with Google and Yahoo first and second respectively.

“The combination of Yahoo and Microsoft is very interesting for the industry and aligned the companies would be a stronger competitor to Google,” said Michelle Schofield, vice president of marketing at Efficient Frontier. “To fully leverage such a merger the companies would need to focus on integrating their vast amounts of data on personalization and demographic targeting, which would be very valuable for advertisers.”

Microsoft is used to playing catch-up. Google won a search advertising deal with AOL in 2005 that Microsoft wanted.

“Coming on the heels of Google’s decision to acquire DoubleClick, this seems to be the next logical step for Microsoft,” said Samir Patel, founder/CEO of SearchForce.

Mr. Patel said that while Microsoft holds third place in the online advertising market, it has the money and management team to make the most of a merger. He also said Yahoo was a prime candidate for acquisition, being at the center of the Internet’s most lucrative market with the right traffic, distribution and technology.

“Integrating the cultures of Microsoft and Yahoo will be challenging, but if successful, can be very powerful,” Mr. Patel said. “Both parties bring in a lot to the table. Microsoft brings its marketing muscle and Yahoo brings its expertise in online advertising. The merger would be a win for advertisers – they would get more traffic while managing fewer search engines.”

Mr. Patel also said that time would play a major role in the success of a merger between the two giants.

“Aligning the strategic vision of the two companies and then executing in unison in the online advertising market against Google would take at least 18 months,” Mr. Patel said. “Google being a dominant player in the market, this could be the deal-breaker in what otherwise would be a winning move for Microsoft.”

The New York Post reported that Google was developing Web-based software that directly competes with Microsoft Office.

“Any collaboration or merger between Yahoo and Microsoft is good for the industry,” said Chris Copeland, senior partner and managing director at Outrider North America, St. Louis. “It gives advertisers a second strong and viable network that would pose many unique advertising opportunities that currently don’t exist, even within the Google network. Whether or not Google would be challenged is still debatable but it would certainly give advertisers a strong second play in the search space and create a dominant display network for many companies.”

Yahoo recently announced it was buying the remaining 80 percent of advertising exchange Right Media for $680 million and thereby increasing its stake in that company to full ownership.

“I believe that a combination of MSN and Yahoo would allow for both to better compete against Google and its sizeable advantage in search,” said Robert Murray, president of iProspect, Watertown, MA. “The combined entity would have a much stronger display offering than Google as well as the integration with all their other tools.”

He said that the combined market share of both companies would attract advertisers. MSN’s investment in both mobile and gaming would advance the combined entity.

“I am sure the Justice Department and SEC would do a deep investigation of this merger from a market and competitive standpoint,” Mr. Murray said. “In my opinion, this merger would have made a lot more sense before MSN went off and built its own search platform.”

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