I have been reading a whole lot of blogs and articles on Microsoft's bid for Yahoo.  People are speculating on why Microsoft is going after Yahoo! right now and will they succeed.  I would expect that the Yahoo! Board will evaluate Microsoft's proposal and inform them it is not in the best interest of shareholders since it does not represent the long term value of Yahoo!   With that statement, the negotiations will really begin.  Microsoft may have some antitrust issues arising from their respective email products.

Will another player come in and create a bidding war?  I think that the other candidates could include Google, traditional media companies, AT&T and eBay.

Google could outbid the current Microsoft offer and the addition of Yahoo! display advertising business would be a great fit in the Google product offering.   The problem for Google is the antitrust issues on the search advertising front.  Google could slice that off but without the underlying Yahoo! network, they are effectively killing that offering.  They will not get a whole lot of love from the government regulators either.  In some respects, Google may want to encourage Microsoft to buy Yahoo! since the integration of Yahoo! into Microsoft will be messy and should take years.  A distracted Microsoft/Yahoo! is the best outcome for Google.  By the time Microsoft/Yahoo! gets it act together, Google will own the search advertising business even more than it does today.

With respect to the traditional media companies, I do not think that there is a whole lot of appetite for the merger of old and new media after the AOL TimeWarner Merger.  In addition, Yahoo! would represent a significant portion of the combined company equity and they would be hard pressed to justify this acquisition.

On the AT&T front, the differing corporate culture would doom the combination from the start.  AT&T will know this challenge and even though they can afford, they will end up passing on it.

eBay would make sense strategic and they have had discussions in the past but the deal cost is too rich for eBay.  In effect, Yahoo! would end up taking over a majority of the combined company.

So why does Microsoft want to Yahoo?  I think that this deal is one of weakness.  Microsoft wants to compete against Google but does not have the search engine to do so.  They need a better search engine like Yahoo has Panama.  Also, Yahoo has a good display advertising business.  Also, Yahoo is a much better brand name than MSN.

I do not think that Microsoft will end up with a real competitor to Google.  With all the integration headaches, they are serving the search business up on a silver platter to Google.  The combined company of Microsoft/Yahoo will only have a third of the internet search market share as compared to Google's 60 percent share.  So the reason, Microsoft is making this offer is that it is third in search and losing market share on almost a daily basis.  Yahoo offers them a tremendous amount of traffic and some additional missing pieces with their internet business.

So what happens if Yahoo's board turns down Microsoft proposal?  Most likely, Microsoft will take their proposal directly to Yahoo!'s shareholders.  They have already laid the groundwork by highlighting the fact that Yahoo! has spent 2007 trying to revitalize the company and their competitive situation has not improved.  Clearly a message to the shareholders.  With over 437 million shares traded today, most of the Yahoo long term investors have sold to financial investors who are incented for this deal to go through.  As a result, the current shareholders will overwhelmingly approve this deal.

I will have some more thoughts as things develop.