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Hours after it was announced, Microsoft Corp.'s $44.6 billion unsolicited offer for Yahoo! Inc. is already being considered a done deal, which not only would create a formidable rival for Google Inc., but could also set off a consolidation wave among consumer Internet companies. Talk of a Microsoft-Yahoo! combination has floated around for years, but the logic behind the pairing today is far different than during the dot-com boom, when both companies were thriving and Google was not yet a threat. Sanford C. Bernstein & Co. LLC analyst Jeffrey Lindsay noted that Sunnyvale, Calif.-based Yahoo! and Microsoft of Redmond, Wash., are both struggling, particularly in the search business, which is key to grabbing a bigger portion of the burgeoning online advertising market. Although Microsoft's $31 per share offer represented a 62% premium over Yahoo!'s closing share price on Thursday, it remains below the target's 52-week high of $34.08, indicating just how much Yahoo!'s fortunes have faded in the past year. This year doesn't look much better. With the weakening economy likely to result in slowing advertising spending across the board, consolidation is a natural response. Microsoft and Yahoo! "face a hard, uphill battle in the Internet search market whether they merge or not," Allan Krans, an analyst with Technology Business Research Inc., said in a research report. But Benjamin Schachter, who follows the Internet media sector for UBS Investment Research, said the merged company, given Microsoft's dominance of the desktop and Yahoo's possession of the most visited set of sites on the Internet, would be a potent competitor, characterizing the move as an aggressive broadside against Google. The deal, along with concerns about slowing growth at Google, pushed Google shares down about 7% on Friday, while markets overall gained ground. Although Google has by far the largest share, at 60%, of the Internet search market and generates enormous revenues from ads linked to such searches, the Mountain View, Calif., company has had relatively little success selling anything other than plain-text ads. Yahoo!, Microsoft and Time Warner Inc.'s America Online in New York all sell far more display ads. As of November, Yahoo! ranked as the top display ad publisher, with market share of 18.8%, followed by Fox Interactive Media Inc. (16.3%), Microsoft (6.7%), Time Warner (5.8%) and Facebook Inc. (1.5%), according to market researcher comScore. Google secured only 1%. Although they have failed to catch up with Google in search-driven advertising, both Yahoo! and Microsoft have strengthened themselves by acquiring major online ad exchanges, automated systems that sell low-cost ad inventory. Last July, Yahoo! completed a $650 million purchase of advertising exchange Right Media Inc., while Microsoft bought aQuantive Inc. for about $6 billion. Combined, Lindsay noted, they would have the largest online ad exchange. Google also is trying to buttress itself with a proposed $3.1 billion purchase of DoubleClick Inc., although the deal has been held up amid privacy concerns. Late last year, the U.S.. Federal Trade Commission approved the DoubleClick purchase, but Google awaits approval from European regulators. How will Google respond? Several analysts say it could try to acquire or partner with America Online's online ad exchange, Platform A, to help gain a greater presence in the display ad business. Meanwhile, big media companies will likely re-examine their online ad strategies and consider potential acquisitions, with ValueClick Inc., a large, publicly traded online ad exchange in Westlake Village, Calif., another likely target. Lindsay noted that some of the biggest consumer Internet sites, such as eBay Inc., would probably also get caught up in a fresh round of merger talk, since a mega-deal invariably leads to "pure speculation" about other possible large transactions. "People are prepared to entertain very large deals today," he said.  Deal Video
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