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Microsoft to continue challenging Google

The software giant firm could seek a variety of deals after walking away from Yahoo Inc, but few would be comprehensive enough to let it challenge Google Inc's domination of online advertising.

business Updated: May 05, 2008 21:35 IST
Anupreeta Das

Microsoft Corp could seek a variety of deals after walking away from Yahoo Inc, but few would be comprehensive enough to let it challenge Google Inc's domination of online advertising.

When Microsoft Chief Executive Steve Ballmer called off talks with Yahoo on Saturday after the Web company rejected his $47.5 billion offer, he gave up what he and investors saw as the fastest way to grow quickly in advertising and online services to take on market leader Google.

"Ultimately, our goal is to build the industry-leading business in search, online advertising, media, and social networking," Ballmer wrote in a Saturday letter to employees, obtained by Reuters.

"Although the acquisition of Yahoo would have accelerated our ability to deliver on our strategy in advertising and online services, I remain confident that we can achieve our goals without Yahoo," Ballmer wrote.

Ballmer said Microsoft could go it alone, but a likelier scenario would be to use some of the cash it dangled in front of Yahoo to make smaller acquisitions or strike up partnerships.

It could form a tie-up with Time Warner Inc's AOL unit or News Corp's Fox Interactive Media unit, which includes MySpace, to draw advertising to its own Web properties.

AOL executives contacted Microsoft about a possible tie-up last month after Ballmer set a three-week deadline for Yahoo to agree to a deal or face a hostile battle, a person briefed on those discussions said on Sunday.

News Corp has also reached out to Microsoft in recent weeks to explore possibilities, including bidding for Yahoo jointly, sources previously told Reuters.

An AOL official was not immediately available for comment.

"A partnership with or acquisition of News Corp's Internet activities or AOL would be a start" in leapfrogging Google, said Peter Misek, an analyst who follows Microsoft for Canaccord Adams.

Google sites had about 590 million unique visitors in December, while Microsoft sites had 540 million and Yahoo's had 485 million, comScore data show. By comparison, Time Warner properties, including AOL, had only 274 million visitors, and Fox Interactive Media sites had 158 million visitors. Arguably, a Microsoft partnership with AOL or FIM would not bring the same numbers as a Microsoft-Yahoo combine would.

Lots of little buys

Microsoft could also go on a shopping spree, buying start-ups that build sophisticated search and online advertising platforms to cobble together a challenge to Google, said Peter Falvey, a banker at Revolution Partners, a technology-focused investment bank.

"They could buy a lot of interesting start-ups and use their marketing muscle," Falvey said.

But none of these options would provide Microsoft the scale it needs to compete effectively against Google.

"Little things like buying Digg would not move the needle for Microsoft," said Todd Greenwald, an analyst at Nollenberger Capital Partners, referring to a Web site that lets people submit and share news stories, videos and other files online.

Greenwald said Microsoft could afford to buy Facebook, in which it invested $240 million last year, and use the social network's popularity to drive traffic to its Web properties.

But it would still not bring the global benefits and brand awareness that a merger with Yahoo would, analysts said.

"Scale and speed to market are what Ballmer needs, and he can't get it by building it organically," said one person involved in the negotiations between Microsoft and Yahoo, who wasn't authorized to speak on the record because the negotiations were confidential.

Still a chance for Microhoo?

But Microsoft is under less pressure to come up with an alternative deal than Yahoo is, analysts said. Microsoft could choose to sit it out and wait for an opportune time to make another Yahoo bid, since that makes the most strategic sense.

Analysts expect Microsoft's stock to rise modestly when the market opens on Monday, indicating that investors are willing to be patient with Ballmer. Some might hope he has the sense to keep on walking, even if Yahoo tries to call him back.

"There are enough skeptics out in Wall Street land that were really questioning Microsoft's strategy, and they will applaud Microsoft for holding firm to the fact that they had a price in mind and they're not going to overpay," said Fred Dickson, a market strategist at DA Davidson & Co.