Yahoo and Microsoft Planning Merger Talks?

We’ve seen plenty of unfounded speculation lately about Google’s plans to acquire NBC, or Dow Jones. Now we’ve got another rumor that Microsoft is asking Yahoo to consider a merger. It’s being reported by both the New York Post and the Wall Street Journal, both citing unnamed sources.

The two companies had preliminary talks last year, but that was before Microsoft built its own search ad system, and Yahoo upgraded to Panama. Now there’s not a whole lot that a merger would offer either company, at least on the search side. On the content side, it might make a bit more sense, since the two networks draw different demographics. It’s not likely that anything will come of these rumors, but stranger things have happened when competitors start getting scared, and merger-mania strikes an industry.

UPDATE: The idea is being discussed all over the blogosphere today, as you can see from the Techmeme coverage.

Forrester’s Charlene Li says it’s a great idea (on paper at least) for Microsoft, but not so much for Yahoo. She goes on to say it will never work. “Given the messiness of a full out merger – and also the limited benefit it would bring to Yahoo! – I believe that a merger won’t be in the works anytime soon. More logical would be partnership agreements where the strengths of each company are shared.”

Former Wall Street Analyst Henry Blodgett, in his Internet Outsider blog, says that if the two decide to merge, the best plan would be an immediate spin-off of the combined entity. “If it doesn’t, both Yahoo and MSN will die,” he says. That seems to defeat the purpose of a merger, though, as Nicholas Carr notes in his Rough Type blog: “Microsoft has come to believe, for instance, that advertising will be central to the software business in the future. It’s not going to spin off its ad networks or search functions.”

UPDATE 2: The opinions keep coming, with the majority of people appearing to think this deal makes sense on some levels, but would never happen for various reasons:

Mathew Ingram, technology writer for the Globe and Mail in Toronto, says the deal makes sense, but the idea of combining Yahoo with Microsoft is like “two icebergs, roped together“:

It makes sense when you consider that Microsoft’s search and related assets are running a distant — and I mean distant — third in the market. And Yahoo, for all of its faults, is a big property with a snappy new engine behind its search, which is (theoretically) supposed to close the gap with Google.

That’s the “glass is half full” argument. The half-empty argument is that both Microsoft and Yahoo are lumbering behemoths with hardly an agile bone left in their sclerotic bodies. Most of their problems stem from the fact that they have accumulated immense bureaucracies — a big part of the impetus for Yahoo exec Brad Garlinghouse’s infamous “peanut butter” manifesto — and a collection of legacy businesses that keep getting in the way.

They are like icebergs: not only is nine-tenths of them unseen, but they are slow-moving and difficult to steer. Impressive? Yes. Powerful? No doubt about it. But fast, or nimble or imaginative? No. Roping them together would do nothing but compound their problems.

VC Paul Kedrosky writes in his Infectious Greed blog that “the idea of Microsoft trying to buy Yahoo, while in a sense inevitable, is still desperately difficult.” He notes the stark differences in company culture, but says the real issue is that this would be a huge undertaking, and a merger of this size is difficult to complete for those with experience, and next to impossible for those without:

[Microsoft] can do the deal, in other words, but the subsequent carnage may be something to behold – which Google might actually end up applauding.

UPDATE 3: The WSJ is now reporting that the talks were going on earlier this year, and have since been called off:

Microsoft and Yahoo in recent months discussed a possible merger of the two companies or some kind of match-up that would pair their respective strengths, say people familiar with the situation. But the merger discussions are no longer active, these people say. The two companies may still explore other ways of cooperating.

Well, it was fun while it lasted.

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