Google may be winner in Microsoft-Yahoo fight

updated 9:53 p.m. ET April 10, 2008

SAN FRANCISCO - Microsoft Corp.’s attempt to take over Yahoo Inc. has become so tortured it may help Internet search and advertising leader Google Inc. grow stronger, undermining Microsoft’s main reason for pursing the deal in the first place.

“We find this to be a very advantageous situation for Google,” Cantor Fitzgerald analyst Derek Brown said Thursday. “The longer this gets dragged out, the better for Google.”

Yahoo signaled it is bracing for a protracted battle late Wednesday when an announcement and a media leak provided a glimpse at its labyrinthine search for alternatives to Microsoft’s bid of more than $40 billion.

The options include an experimental advertising alliance with Google that could lead to a broader partnership and, according to published reports, a combination with the online operations of Time Warner Inc.’s AOL. Google also owns a 5 percent stake in AOL.

As part of the AOL deal, Time Warner would get a roughly 20 percent stake in the merged entity in return for a substantial sum of cash that would help Yahoo buy back some of its stock at a price well above Microsoft’s offer, which was initially valued at $31 per share.

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

“This is the first time that we have seen real feasible alternatives that could derail the Microsoft deal,” said analyst Jeffrey Lindsay of Sanford C. Bernstein & Co.

Other analysts doubt Yahoo will succeed in thwarting Microsoft but believe it could force the world’s largest software maker to raise its offer as high as $35 per share, or about $50 billion.

For its part, Microsoft has indicated that it may lower its offer if Yahoo doesn’t accept the current bid by April 26.

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But Microsoft made that threat before the details about Yahoo’s alternatives with Google and AOL emerged.

Although Microsoft has plenty of money to up the ante on its own, the Redmond, Wash.-based company may draw upon another deep pocket — Rupert Murdoch’s News Corp.

Under this reported scenario, News Corp. would contribute the Internet’s top social network, MySpace.com, and some cash in a Yahoo takeover. The proposed deal would put three of the Web’s most popular sites — Yahoo, MySpace and Microsoft’s MSN — under the same umbrella.

In another ironic twist, Google could benefit if Microsoft and News Corp. buy Yahoo because it already has a long-term contract to show ads on MySpace.

Microsoft, Time Warner and News Corp. all declined to comment Thursday. A Yahoo representative didn’t respond to inquiries about the AOL deal. Google and Yahoo announced their advertising test Wednesday.

Yahoo directors are expected to meet Friday to discuss the company’s options.

Investors seemed to welcome the latest developments. Yahoo shares rose 82 cents to $28.59 while Microsoft shares gained 22 cents to close at $29.11. The stocks of Google and Time Warner also moved up, while News Corp.’s Class A shares dipped 5 cents to $18.89.

The reported negotiations to bring together some of the world’s largest Web sites underscores the Internet’s maturation as a business sector. As consumers spend more time online, the smart money is following them — and now there’s a mad scramble to latch on to the prime properties in this promised land of future profit.

“The most likely outcome here is that a few players will become more and more dominant on the Internet,” said James Owers, a Georgia State University professor specializing in media and corporate finance.

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