Yahoo must take the deal from Microsoft

In a move that came as a surprise to no one expect those living under a rock, Microsoft bid $44.6 billion for Yahoo.

According to Steve Ballmer, "Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers, and publishers."

And while Ballmer stopped short of mentioning Google by name, this one statement highlights an important element of Microsoft's strategy. As I've mentioned before, Ballmer and company are focused on Google more than any other company and this deal with Yahoo may finally give it the leverage the company needs to capture greater influence online.

But I digress. Today, the real story surrounding the possible Yahoo acquisition has nothing to do with Google at all. Instead, today's announcement surrounds the absolute need for Yahoo to accept this acquisition to save itself.

Of course, the only problem is, nobody knows if it will.

According to Microsoft, it had "off and on" negotiations with Yahoo about one year ago, but was turned back by the company because Yahoo believed there could be a "potential upside if management successfully executed on a reformulated strategy based on certain operational initiatives, such as Project Panama, and a significant organizational realignment."

Terry Semel, Yahoo's former chief executive who recently severed ties with the company,, told those organized at Syracuse University last year that, "[both companies] discussed search, and Microsoft co-owning some of [Yahoo's] search." Semel continued, "I will not sell a piece of search - it is like selling your right arm while keeping your left; it does not make any sense."

And yet, we're back to square one. And now that Semel is out of the picture and his right arm is safe, will Jerry Yang, one of Yahoo's co-founders feel the same way?

Why it should sell

Let's face it -- Yahoo isn't a company that has any real chance of turning things around immediately. As it stands, Yahoo's stock price has floundered around $19, even though it's currently up about $8 following the announcement. And considering Microsoft is willing to pay a 62 percent premium on the stock price, why wouldn't Yahoo jump at the opportunity? After all, is there any chance the price will jump to $31 anytime soon on its own?

Besides that, Yahoo's revenue may have increased year-over-year, but its net income has dropped an astounding $1.3 billion in just two years. To make matters worse, the company is losing ground in US market share to Google and only holds 22.9 percent. Compare that to Google's 58.4 percent, and there's more to like in this acquisition than dislike.

So what would the Microsoft-Yahoo merger look like? No one really knows. TechCrunch has posted a crude spreadsheet that holds no water, and others have tried as well, but there's no way to know exactly what Microsoft has in store. Let's face it -- just because Yahoo made $660 million last year and Microsoft made $16.9 billion, it doesn't mean we can simply add those numbers together to see the real effect.

In reality, asBallmer points out in his message, Microsoft will use scale economics to its advantage and utilize the best that both companies have to offer to create one well-run organization. In other words, Yahoo's expenses would drop significantly and if done properly, Microsoft could probably close all of Yahoo's crappy divisions that do practically nothing, stop the company's acquisition madness and get some real value out of it.

In fact, it wouldn't surprise me if Microsoft had been working through this for at least the past year and knows exactly what it wants to do in order to recoup those billions as soon as possible.

As far as I can tell, Microsoft's plan would behoove both companies. Instead of wasting time trying to take down Goliath, Microsoft and Yahoo could band together and become a far more worthwhile opponent. That said, the newly-formed company would still have a considerable amount of work to do and the chances of it supplanting Google going forward are slim.

But what some may have missed in this deal is the ability for Microsoft to compete more effectively against Google in the advertising space. After all, now that Google has single-handedly dominated the advertising business for so long, Microsoft needed some leverage and Yahoo must have seemed like the easy candidate.

Suffice it to say, this will be fun to watch. And as long as Yahoo applies reason to its situation and realizes that it's in a poor position in the market, look for this deal to happen sooner rather than later.