Could Microsoft-Yahoo make Google stronger?

updated 7:41 p.m. ET Feb. 7, 2008

SAN FRANCISCO - Microsoft Corp. views its proposed takeover of Yahoo Inc. as the missing piece in its Internet advertising puzzle, but skeptics think the deal could become a jumbled mess that will help make rival Google Inc. even stronger.

(Msnbc.com is a joint venture of Microsoft and NBC Universal.)

The second-guessing about Microsoft's unsolicited bid, initially valued at $44.6 billion, is typical for large acquisitions. Investors are debating whether the benefits outweigh the potential management distractions, sagging employee morale and other headaches that can arise after the deal is done.

But the dynamics of the rapidly evolving Internet and sheer size of this deal have magnified the worries about a Yahoo acquisition backfiring on Redmond, Wash.-based Microsoft.

The investor backlash during the past week has reduced Microsoft's market value by more than $40 billion, an amount roughly equal to the current value of its bid for Yahoo.

"Whenever you see something like that, you have to wonder if something is wrong," said Anant Sundaram, a professor of finance at Dartmouth College's Tuck School of Business.

Yahoo board emerges mostly unscathed Pickens rips Yahoo management, dumps shares Yahoo settles with activist investor Carl Icahn Congress holds hearings on Yahoo-Google deal Yahoo spurns Micosoft again as blood boils Microsoft seeking allies for new Yahoo move Yahoo’s board takes its case to shareholders Yahoo shakes up management team

If Microsoft winds up in a lengthy antitrust battle to seal the deal or runs into trouble cobbling together the disparate pieces, analysts say Google will likely be able to widen its already formidable leads in the Internet's lucrative search and advertising markets.

"There is going to be a lot of red tape, bureaucracy and (cost cutting), so one would think there could be long wait before we see any benefits to this deal," said Cantor Fitzgerald analyst Derek Brown. "While all that is going on, Google will be stepping on the accelerator."

Google seems intent on trying to prolong the antitrust review if Yahoo and its shareholders accept Microsoft's offer. The Mountain View-based company already is lobbying regulators around the world to take a hard look a Microsoft-Yahoo combination.

A Congressional committee had been scheduled to discuss the proposed deal Friday, but the hearing was postponed late Thursday.

Meanwhile, a prominent technology blog has reported that Google may be buying Bebo.com, a popular online hangout, for more than $1 billion. The rumor was posted by TechCrunch, which in 2006 reported Google's plans to buy online video pioneer YouTube just days before that acquisition was announced. Google declined to comment Thursday.

Wall Street's misgivings about Microsoft's bold gamble have contributed to a 14 percent decline in its stock price since it was announced last week. On the flip side, the bid has lifted Yahoo's previously sagging stock by 51 percent.

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