With Yahoo apparently off the table, what's Microsoft's back-up plan?
Microsoft has said for some time that it has a strategy with or without Yahoo, but it's a strategy clearly in need of a jumpstart.
In search, for example, Microsoft has been trying to take on Google for some time, but it remains a distant third in search queries and also has struggled in the all-important battle of monetising each search query.
Microsoft outlined two key reasons for buying Yahoo — adding its talented engineers and getting the significant boost in scale that would come from buying the number two player.
Clearly, Microsoft could use just a fraction of those billions and get a ton of engineering talent. The scale problem, however, is a more challenging one. As Microsoft CEO Steve Ballmer himself said in a meeting with employees on Thursday, there just aren't that many companies out there with any significant scale.
As for where else the company may look, Ballmer's recent comments to The Wall Street Journal offer a cheat sheet to the short list.
"There's really only five or six that really have any scale," Ballmer said in that interview. "Worldwide, you'd maybe get seven or eight."
Among those companies with scale that Ballmer named were Facebook, MySpace.com, and AOL, along with the Yahoo, Google, and Microsoft itself.
Although Facebook and MySpace have huge audiences, selling advertising against those sites has proved to be trickier than in search. Plus, Microsoft had to agree to a massive US$15 billion valuation for Facebook just to get an ad deal and a small slice of the company. MySpace, meanwhile, has an add tie-up with Google. AOL is certainly seen as in play, having been a frequent rumor target as a potential partner for Yahoo.
Still, Ballmer said in his letter to Yang and in a public statement that he will look at other business moves and may expect other deals to follow.
"I wouldn't be surprised to see Microsoft going on a buying spree to buy some of the things they thought they might be getting from Yahoo," said Gartner analyst Allen Weiner. "I think they'll look seriously at some of the significant Web 2.0 companies and what they might add to the Microsoft label."
Feint signals
There's also the possibility that Microsoft makes another try at Yahoo once the dust settles a bit. Microsoft says its offer for Yahoo is off the table, but could this be just a negotiating ploy?
Clearly, Microsoft is not having luck getting Yahoo to consider the price it is willing to pay, so the direct option hasn't worked. CEO Steve Ballmer says that Microsoft has also ruled out going directly to shareholders, a move that would likely require a nasty, costly, and time-consuming proxy fight.
In particular, Yahoo has proven itself adept at making itself a less attractive takeover target. In addition to the usual sorts of poison pill defenses, it has found other weapons like cutting sweetheart deals for employees and negotiating a partnership with Google, the very company Microsoft is looking to rival.
Such a move might not pass regulatory muster, but Ballmer indicated in his letter to Yahoo's Jerry Yang that Yahoo's moves have succeeded in making the proxy battle sufficiently unattractive.
"Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo undesirable as an acquisition for Microsoft," Ballmer wrote. "We regard with particular concern your apparent planning to respond to a 'hostile' bid by pursuing a new arrangement that would involve or lead to the outsourcing to Google of key paid Internet search terms offered by Yahoo today."
The possibility is unlikely to be completely dead:Yahoo shareholders may find it tough to swallow the fact that Yang said no to US$33 a share and push him back to the negotiating table. In that scenario, the Yahoo that Microsoft finds so attractive could once again be on the market.
There's also the possibility that Yahoo tries to go it alone for a little while, stumbles, and Microsoft comes back with a new offer.
For his part, Gartner analyst Allen Weiner thinks Microsoft really did walk away. "I think the drama is pretty close to being over," he said. Microsoft and Yahoo both think they can rebuild themselves to their glory days on their own, he said.
That's not to say that a good feint can't seal a deal.
Oracle walked away from its bid for software maker BEA Systems when the companies couldn't come close to a price. But both companies returned to the table and ultimately negotiated an amicable deal — although it's also worth noting that Oracle ended up paying far more than its original offer.
CNET News.com's Stephen Shankland contributed to this report.
