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5 reasons why Microsoft will buy Yahoo!

The buyout buzz is building again. And here's why the tech giants will team up — and take on Google.
/ Source: Motley Fool

The buyout buzz is building again. A story in this morning's New York Post indicates that Microsoft is still debating an offer to acquire online rival Yahoo!, even as Microsoft's chief deal-maker is leaving the company in March to start his own firm.

The deal would be huge. It's got to happen. And I'll give you five reasons why Microsoft must and will succeed in snapping up Yahoo!

1. 2 + 3 is still less than 1
The latest batch of Nielsen Online data is sobering. Google continues to grow its market share at the expense of Yahoo! and Microsoft. It's not even close, really.

Yahoo! and Microsoft now account for less than 30% of the country's search requests. Another few monthly slips and Yahoo! and Mr. Softy combined will command just half of Google's search traffic.

There is just no conceivable way for Microsoft or Yahoo! to catch up with Google, but a combination would force advertisers to consider Microhoo as more than just a second-tier outlet for generating leads.

2. Turn a bleeder into a leader
Despite the hubbub over the chunky margins to be had in cyberspace, one of the biggest industry shockers is that Microsoft's online arm is actually posting operating losses. That may change after the recent acquisition of the profitable aQuantive, but snapping up Yahoo! would definitely get MSN out of the red.

Right now, running its online business at a loss is no big deal for Microsoft. It is carving out fat margins in its software stronghold, enough to more than offset any shortcomings in its online and Xbox subsidiaries. Why is that important? It brings us to the third reason for rushing a shotgun wedding.

3. Microsoft needs to wean itself off the software cash cow
As the world's largest software company, Microsoft has been feasting for decades on sales of its industry standard operating system and applications software. There are reasons to be fearful there.

Everyone from Google to Sun Microsystems has Web-based apps that compete directly with Microsoft Office. Heck, even Adobe got into the game with its recent buy of the developers behind Buzzword.

And now that the cloud computing revolution is sending more desktop applications online, will premium operating systems be as relevant in the future? It's true Microsoft has the leading Web browser, but that will become a more leveled playing field now that so many browser-agnostic gadgets with Web-surfing capability are hitting the market.

Microsoft's dominance in software isn't going away overnight, of course. However, Microsoft may as well snap up Yahoo! to make sure it's not carrying all of its eggs in a software-tethered basket.

4. Yahoo! is a ticket to the East
MSN China has struggled. Microsoft's battles against piracy in the East have been well documented. This comes at a time when some of Yahoo!'s best investments — stakes in Yahoo! Japan, Alibaba, and Gmarket — find Yahoo! sometimes holding up as a better brand abroad than it is closer to home.  

We live in a global marketplace. Microsoft knows this, but Yahoo! is a good friend to have in its corner as it tackles faster-growing markets overseas.

5. Get in under the regulatory cutoff
Microsoft may have cheered when the European Commission decided to take a closer look at Google's pending purchase of DoubleClick, but it's really more of a last call for the dot-com barflies.

Microsoft has been busy lately with smaller Internet buys, but it may as well land the barfly that it truly wants to take home for the night — Yahoo! — before regulators cut both Microsoft and Google off from the dot-com watering hole.

Just kiss already
Time hasn't been kind to the non-Googles. Yahoo! is also vulnerable. A year ago, it had little reason to cash out. The Panama upgrade to its paid search program was supposed to bring its platform more in line with Google's performance. The IPO was going to create huge paper profits. Well, the deal went over well, but that bounce is history. And Panama? Well, let's just say that enhancing Yahoo!'s contextual advertising program will take more than just a few tweaks.

The time is right for Microsoft to come on strong. With Bill Gates retiring this year and the pressure on Steve Ballmer to take Microsoft to the next level, this is the kind of exclamation point — both at Microsoft and in the Yahoo! moniker itself — that Mr. Softy needs.

It's inevitable, so why wait?