When you think about online shopping the thing that usually comes to mind is whipping out your credit card and browsing sites like Amazon or eBay for hot deals. But if you are Microsoft when you go internet shopping you buy a portal. This week the software giant flexed its financial muscles and reaped a ton of press by making an unsolicited bid for Yahoo!. Their opening salvo of $44.6 billion would make it the largest that the company has attemptepd.
Microsoft CEO Steve Ballmer called Yahoo! CEO Jerry Yang the night of January 31 to 'discuss' the proposal. The time to strike was right: U.S. regulators had just approved Google's acquisition of DoubleClick, and this reassured Microsoft that its own massive deal could actually go through. Microsoft had already tried to acquire the company last year when Yahoo"s stock price was much higher but that overture was rebuffed by Yahoo"s management who felt they needed no help in improving the sad state of their company. Now a year had passed and Yahoo"s share price fell below $20 for the first time since 2003; and the 2008 outlook was not much brighter. This time Microsoft was determined to get a deal done even if it had to bring in other partners like GE's NBC unit, with which it already has several partnerships.

So why is the world's premier software seller threatening to beat Yahoo! into submission with its checkbook? First the deal would most certainly help Microsoft bridge the chasm between itself and Google in a hotly contested, highly lucrative search market. Secondly it would increase its ad display business at a time when the big money advertisers are still looking at scale and lastly there are the backend benefits of joining their engineering and infrastructure resources. Merging the two runner ups would offer advertisers a decent sized search alternative. Microsoft is falling over itself to promote this deal as something that would increase options for advertisers, publishers and consumers in a market dominated by one super player. As it stands now Google owns search, its worldwide market share was 62.4% at the end of last year compared to Yahoo"s 12.8% and Microsoft which trailed in third place with a paltry 2.9%. Even a combined Microsoft Yahoo! portion would only amount to half of Google's U.S share and about a quarter of their worldwide numbers.

Individually both companies have struggled and now with all the challenges inherent in merging two organizations of such scale, it's hard to imagine them swiftly hammering out the working situation and getting to work on creating easy, attractive solutions for advertisers. They will most likely be bogged down in regulatory red tape, and busy flipping coins over which search to use while Google continues its march towards total search domination and improves its video, offline and display offerings in the process. In the short term at least, Google will benefit from the labor pains of the Microsoft Yahoo! birth.
Yahoo! and Microsoft have something else in common both have seen their share of the search field decline in the last year while Google's went in the opposite direction. But even once unassailable Google has been showing signs of weakness in recent months; it seems the years of plenty are over. Google shares, slumped after Microsoft made its Yahoo! bid, down 30% from their November high (translated that is $70 billion down the drain, more than the value of Time Warner or the price offered for Yahoo.) But considering the size of Google this slow down following a meteoric rise is to be expected. It is still the hottest name in online advertising but question is will it remain so for long?

Google can take comfort in the fact that big media mergers often fall short of expectations. It is difficult to join two huge companies smoothly and even harder when both are foundering with less than impressive track records. Add to that two vastly different corporate cultures, Microsoft's button down boring pragmatism to Yahoo"s laid back Gen X attitude and you have quite the job on your hands. But it has been done before. Take a stroll down memory lane to January 2000 when Yahoo! stock reached an all-time high of $475 a share and the company had a market cap above $100 billion. This prompted their then biggest competitor America Online to enter into a dangerous liaison with Time Warner, the biggest media deal in history. We all know what happened after the ink dried on that over-hyped megadeal. Long story short; the bubble burst taking stocks and the economy down with it. Suddenly the honeymoon was over for newlywed AOL/Time Warner, their merger going down in the history books as a flop of epic proportions. So it feels strangely like déjà vu when this week, not long after Google shares hit an all-time high of $747 with a market cap of $234 billion, that their archenemy Microsoft took a similar route and announced its own megamerger desires.

Ostensibly the motivation was all about improving search but a much bigger catalyst for moving ahead with the takeover may be plain old panic on Microsoft's part and apprehension over their long term strategy of transitioning into a web-based software company, rather than one that sells and distributes products in boxes. This paradigm shift is something Google is trying to exploit and promote with their Google Apps suite of web-based productivity software to students and small-business owners (who also happen to be daily search users). Let's not forget it is Office that pays the bills in the house that Gates built and anything that threatens Office threatens Microsoft. Now the lines between consumer applications and business applications are blurring and Yahoo! could bring a lot to the table with its consumer tools like email, groups and instant messaging. Yahoo! also has the bonus of a large audience and this would be invaluable in developing the next line of consumer applications.

This is a classic case of the second and third players ganging up to bum rush the first. Google will remain the larger by far but a united Microsoft and Yahoo! would have a much better change of challenging their dominance in the online ad market. But is the software giant overpaying for a company that has long lost its luster and is no longer thought of as exciting or innovative? To many in Silicon Valley, Yahoo! is old news and this deal a very expensive Band-Aid. Microsoft should have bought Yahoo! ages ago. In 2003, Microsoft tried its hand at building its own search platform while Yahoo! opted for the easy way out and bought the technology it needed. It gobbled up Inktomi ads for $235 million which gave it search results that today rival Google's. Then there was their $1.6 billion Overture deal which handed Yahoo! control of a huge paid-search business. Most importantly, it allowed Yahoo! to keep pace with Google rather than waste time playing catch-up.

Seeing the error of its ways Microsoft is hitching its train to Yahoo"s engine and this could either speed it up or slow it down dramatically if they can't resolve the many hurdles down the track. Case in point, Yahoo! has the larger advertiser base and these clients already use its Panama ad server platform so they would not appreciate being made to migrate to Microsoft's AdCenter, nor would Microsoft relish throwing out a platform it spent years developing. And there are more instances like this; what becomes the search brand: Yahoo!, MSN or Live? What happens to Yahoo! Mail does it just go away? Or to photo service Flickr for that matter? A merger will almost certainly mean much consolidation and that may get push consumers to revaluate their options. Instead of being forced to move from Yahoo! Mail to a new Microsoft Yahoo! mail service they may take a serious look at Google's Gmail.

Microsoft has no shortage of cash and could hold keep fighting the good fight against Google alone so why bother with the sturm und drang of a merger. Even if you set aside all the factors I mentioned earlier there is one reason that would explain it all. It is taking too long to catch up, and in an effort to keep from falling even further behind, Microsoft is basically buying its way to number 2 in the search race, a position that is certainly better than its current number 3. Google and government regulators may try to rain on their parade and a lot of new developments and complications will emerge before this thing is consummated but right now they'd better start picking out better names than Yahoo!Soft or MicroHoo or this kid will get teased in school.