Google is reportedly considering a bid to purchase Yahoo's core business, while Microsoft has also been discussing a potential joint bid for the ailing Internet company.
According to a Wall Street Journal report, Google has already approached two private-equity firms about potentially helping to finance a deal to buy Yahoo.
Yahoo chief executive Carol Bartz was fired by the board of directors last month, and since then the company has reportedly been looking for buyers.
Despite a 20% growth in global online advertising, Yahoo continues to struggle, reporting third quarter revenue of $1.217 billion - a 24% decline.
In comparison, search giant Google reported revenue of $9.72 billion for the same quarter, with a 33% gain year-on-year.
In 2008, antitrust lawyers stopped a Web-search advertising partnership between Google and Yahoo. In 2009, however, Yahoo signed a 10-year search contract with Microsoft.
According to the Wall Street Journal, sources close to the companies say Microsoft is also considering financing a joint bid for Yahoo. Under the joint bid, Microsoft wouldn't be looking for full ownership, but would act as a financier in order to maintain influence over Yahoo's future.
Slim chance
MD of Strategy Worx Steven Ambrose says: “Yahoo and Google's core businesses are essentially the same, and any merger would entrench Google's dominance and will attract Competition Commission-style investigation from US antitrust laws.”
“Google would have absolute dominance and the power to direct and intelligently data mine almost all online activity. They are already dangerously close to this situation as it is. The merger of Google and Yahoo would be essentially unstoppable.”
Ambrose, however, notes that the likelihood of such a merger is slim.
“There is much more than an even chance that any potential merger would be stopped or the conditions imposed would be so severe as to make the transaction very unworkable,” says Ambrose.
New media lawyer Paul Jacobson says a Yahoo purchase is pure speculation at this point. “Even if it happens, we wouldn't really know the benefits until we saw how Yahoo would be integrated or otherwise added to a would-be purchaser's offerings.”
Not worth it
Jacobson says he's not convinced a Yahoo purchase would benefit Google enough to make it worth the effort.
“I suppose Google could theoretically buy Yahoo and fold its business into Google's own businesses, but I don't know how worthwhile that would be. If Google was able to take over Yahoo's users through a purchase it would probably be more beneficial to its search and advertising business primarily.”
Jacobson says the fact that Yahoo search is powered by Microsoft's Bing gave Bing a boost in market share.
“Shifting those users to Google's search would cement Google's dominance, for sure,” says Jacobson. “Given the antitrust issues, I don't see a Google-Yahoo buy-out happening though.”
However, Jacobson says it would be interesting if Google bought some Yahoo properties like Flickr.
“Folding Flickr into Google Photos could make the combined offering pretty appealing and give Google Plus a boost.”
According to Jacobson, a Yahoo purchase would probably make more sense for Microsoft, as it is yet to develop a compelling online offering.
“Microsoft almost bought Yahoo a couple years ago when it would have been more expensive. Microsoft was prepared to pay around $31 a share in 2008 and the share price is currently around $16. If Yahoo still has some value for Microsoft, now is not a bad time to buy.”
“Traffic to yahoo.com is almost double traffic to msn.com in the US (according to Compete.com) and with Microsoft launching its Office 365 Web offering, the Yahoo user base could be a welcome boost. That's just one possible benefit, I imagine.”
Two-horse race
Ambrose says the online search space is essentially a two-horse race between Yahoo/Microsoft and Google.
“Any further consolidation in this space is not good for innovation, competition or the Internet-using public.
“All this speculation is complex money making transactions that will continue on some levels, simply because the stakes and potential rewards are so high,” adds Ambrose.
“The chances of a clear-cut merger either to Microsoft or Google are fairly low, but some form of financial involvement from Microsoft is the most likely scenario.”
Facebook factor
Jacobson says the big target remains Facebook, which seems to be “streaks ahead of its competitors in most areas except search”.
“Facebook wouldn't need to buy Yahoo, but the other major services must be thinking about Facebook's dominance in the social Web when considering their strategy.”
Google is reportedly looking to grow its display ad revenue - an area which Facebook currently dominates. According to eMarketer, Facebook earns over $2 billion in revenue annually from display advertising. Yahoo earns a reported $1.6 billion, while Google is still behind on $1.1 billion in the display advertising space.
Jacobson also notes that since Microsoft is a Facebook shareholder, it may be better served working on closer ties to Facebook.
“That said, Microsoft buying Yahoo could benefit Facebook indirectly and make it a tougher competitor to beat for Google,” says Jacobson.
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