Microhoo: When will the mating dance end?

The Microsoft-Yahoo mating dance or proposed shotgun wedding continues to drag out. Microsoft persists in saying nice things about Yahoo and outlining the reasons why the acquisition of $45 billion to $50 billion still makes sense (going after the high-profit-margin money with search and ads).

Yahoo recently outlined the reasons why Microsoft should pay more than $31 per share, citing a projected doubling of operating cash flow from $1.9 billion to $3.7 by 2010.

At the same time, as Mike Arrington reports, Yahoo is making efforts to ensure that the most valuable talent at the company doesn't abandon ship. Losing more key people would hamper the execution stream and depress the value of the company.

In the last few weeks, I have heard from some Yahoo employees who say they are not opposed to joining up with Microsoft. Perhaps they see it as inevitable (for an increase in price per share) or as the best path for Yahoo to take given the competitive environment (Google, Facebook, Microsoft, MySpace.com, etc.) and the company's inability to get rid of the "troubled" label.

Thomson Financial is predicting that Yahoo will report first-quarter earnings of 11 cents per share on revenue of $1.32 billion. For the full year of 2008, Yahoo is expected to return 46 cents per share on $5.6 billion of revenue. Given that most companies would be happy with Yahoo's financial position, the context for the perception of Yahoo as "troubled" is Google, which is expected to generate $3.66 billion in its first quarter of 2008 and owns 59.2 percent of the search business compared to Yahoo's 21.6 percent (February 2008, ComScore).

But Google has run into some problems with paid-click growth, and its stock price has nosedived by 40 percent from a high of nearly $750 in November 2007.

Most tech industry people I speak with believe the deal will get done. Many are skeptical that such a union can be successful, given the past history of mega-mergers (AOL and Time Warner, for example). Microsoft has been studying the HP-Compaq merger to get a better handle on the challenges of bringing Yahoo into the fold. The combined numbers of users, and how that might change the landscape, is not lost on either party.

Microhoo can try to chip away at Google's search dominance, but the more near-term benefit of the proposed union would be the number of collective users and their time spent. As the data provided by Yahoo shows, the content and community assets and number users across those services is an advantage over Google. Users of e-mail, instant messaging are in the tent, where they might consume more monetizable content services--news, finance, sports, weather, autos, technology, and entertainment.

Google, Yahoo and Microsoft all lack a strong social networking hub. Microsoft's investment in Facebook may amount to closer partnering, but Yahoo plans to build out social networking from its base of communications services.

At the Consumer Electronics Show in January, Jerry Yang showed a prototype of what he called "Yahoo Life." He gave an example of dragging the thread of an e-mail conversation about meeting at a restaurant into a map, bringing up the profiles of those on the e-mail, noting preferences (for food in this case) and suggesting the appropriate restaurants in the area.

Some of these social features Yahoo is cooking up are expected to appear in the next few months. Deploying those social Web concepts across both Yahoo and Microsoft could be a powerful outcome of a union. With its thousands of sharp engineers, Microsoft could bring some firepower to more rapidly develop the necessary technologies and usage scenarios.

The winter of discontent is not fully behind us, but I expect a wedding between the two parties this year. The China issue--a new Chinese law that goes into effect August 1 to strengthen antitrust regulations--won't squelch the deal if they really want to get it done. The honeymoon will be very short, and Jerry Yang can go back to being chief Yahoo and not chief executive.

See also: Kara Swisher on Microhoo personnel