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.
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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.
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.
Microsoft's drop has been far worse than the 3 percent decline in the Dow Jones industrial average, which includes Microsoft as one of its components.
Microsoft's confidence in the Yahoo takeover is reflected in the price it's willing to pay — about 15 percent of its market value — for what would be the biggest acquisition in its 33-year history.
"Obviously if I didn't think this was a good investment, a good acquisition financially for the company...we wouldn't do it," Steve Ballmer, Microsoft's chief executive, told the company's employees shortly after announcing the Yahoo offer.
Microsoft believes it could start making money from the Yahoo acquisition within two years. Many analysts agree that bidding for one of the Internet's best-known brands and biggest audiences makes sense, especially after Yahoo's declining profits caused its stock price to fall more than 40 percent in the three months leading up to the offer.
"We believe strategically this is the correct move for Microsoft as they continue to build...a viable competitor to Google and gain mind share in their advertising platform," RBC Capital Markets analyst Robert Breza wrote in a research note earlier this week.
But other analysts wonder if Microsoft is paying too much for a company that's lost its luster as young Web surfers migrate from all-purpose Web sites like Yahoo to online social networks like News Corp.'s MySpace.com and Facebook.com.
"It seems to me that Microsoft should be chasing Google by looking down the road and figuring out what the next big thing will be rather than be looking in the rearview mirror and buying the last big thing," said Cowen and Company analyst Walter Pritchard.
Microsoft last year paid $240 million for a 1.6 percent stake in Palo Alto-based Facebook to grab a piece of the booming social networking market.
Pritchard thinks Microsoft would be better off foregoing the Yahoo acquisition and spending considerably less to acquire privately held LinkedIn, a fast-growing professional networking service that would have fit nicely with Microsoft's Outlook program.
The poor track record of past high-tech acquisitions also has added to the doubts. The long list of flops is topped by America Online's acquisition of Time Warner Inc. eight years ago, a deal that still haunts both companies.
Another major software maker, Oracle Corp., has proven some tech deals can pay off, having spent more than $25 billion to buy dozens of its smaller rivals during the past three years. Oracle's profits have been on the upswing during that span, lifting its stock price about 40 percent.
It's unlikely Oracle CEO Larry Ellison will offer any insights to Microsoft, however, given his utter disdain for his longtime rival.
The hand-wringing about Microsoft's bid for Yahoo assumes the offer will be accepted, and that outcome remains uncertain.
Yahoo's board has spent the last week examining alternatives, an exhaustive process the company has indicated could drag on. If Yahoo spurns the initial $31-per-share offer, some analysts think Microsoft will sweeten its bid to as much as $35 per share.