Whilst rumours of a Microsoft bid for Yahoo! resurfaced last year, the Redmond based company finally made an official bid. At $44 billion the Microsoft offer looks generous while Yahoo's current market cap is around $39 billion, but given the potential upsides to Microsoft of this merger it's really not a price premium.
What Microsoft really wants
While many still think of Yahoo! as a search engine/portal, it is much like Google really a giant ad broker. In aquiring Yahoo! Microsoft would take second place in search engine market share while not surpassing Google it at least puts Microsoft within reach of its rival. It also gives Microsoft access to a number of Yahoo!'s stronger branded services such as Flickr, del.icio.us, and upcoming who all have pretty strong user support. Ultimately though the value of these services is largely dependent on Microsoft's ability to fold these services into their corporate portfolio without loosing loyal users in the process. Yahoo! mail obviously provides a substantial user bump to competing Hotmail, even without combining the two products it still provides Microsoft with a considerable increase in potential eyeball for their advertising.
Can it happen?
Microsoft vs the Department of Justice has been well documented and only days ago a federal judge ruled to extend the sanctions placed on Microsoft during their anti-trust trial by 2 years. One presumes this does not bode well for a Microsoft Yahoo! hookup in the eyes of the DOJ. However any friction the deal might receive in the US pales into significance when compared to the EU regulatory authorities view, which given the tangle they're currently imbroiled in with Microsoft looks likely to be less than favourable.
Can Google run interference?
Certainly any deal won't please Google, and they can attack the deal on two fronts. Firstly they can use their considerable lobby experience to persuade law makers that the deal isn't good for the consumer. They could also make overtures to Yahoo! in an attempt to create partnership between the two companies, as covered by the New York Times
At this stage it's unclear how much Microsoft wants this deal and what they have in reserve should it fail. Some may see this bid as a tacit admision that they are failing in their efforts to effectively compete with Google, others that they are simply pursuing a strategy of acquisitive growth. Frankly at this stage there is no way of knowing, but it will be an interesting battle to watch.
