Even at a big discount, Yahoo acquisition would be a mistake for Microsoft

Redmond rumored to be interested in once more making a bid to buy troubled Internet pioneer

The rumor on Wednesday that Microsoft is considering making another bid to purchase Yahoo was quickly buried by the news that Apple co-founder Steve Jobs had died.

Still, investors took enough notice to push up Yahoo shares (NASDAQ: YHOO) by 10% to 15.92, though by early Friday the price had slipped back to 15.62.

A far cry from Microsoft's February 2008 offer of $31 a share, which valued Yahoo at $44.6 billion. Today Yahoo's market cap is $19.8 billion.

Sounds like a bargain for Microsoft this time around, right? Theoretically, perhaps. But the real question isn't how much Yahoo is worth. It's whether buying Yahoo at any price would be more trouble than it's worth for Microsoft.

Most people remember Microsoft's original bid for Yahoo nearly four years ago, as well as Yahoo's in-hindsight foolish dismissal of it on the grounds that Redmond's offer insultingly undervalued the Internet pioneer -- even though Microsoft's offer was 62% above what Yahoo's market cap said the company was worth at the time.

What many people forget is that Microsoft was so determined to buy Yahoo in early 2008 that it contemplated launching a hostile takeover after being rejected by the Yahoo board of directors. Back then Microsoft was trying to build up its lame Internet (search) business because it saw Google as its main competitor.

Well, Google still has about two-thirds of the online search market, while Microsoft's money-losing Bing has nearly 15%. Yahoo's search share is 16%. Further, Microsoft and Yahoo already are search partners, with Bing powering Yahoo's search engine in return for a share of ad revenue. If Microsoft thinks spending $20 billion to own 30% of online search makes sense -- when it already owns most of that percentage -- there's a reason Steve Ballmer is underpaid. As one analyst said, "Why buy the cow when you already get the milk for free?"

Beyond that, though, what Microsoft would be buying if it acquired Yahoo is a large headache. Yahoo is an unfocused mess, even more so than it was nearly four years ago. Carol Bartz may have cut expenses during her brief tenure as Yahoo's chief executive, but she didn't have any discernible (or at least well-communicated) vision.

Sure, there's the "value of Yahoo's assets" argument, which is similar to the arguments made in favor of the Time Warner-AOL deal back in 2000. Look how that turned out.

The bottom line is that Microsoft is not an Internet company, and if it wants to be an Internet company, it would be better off allocating its resources toward something other than the Yahoo sinkhole. Just because Yahoo may have some value that can be "unlocked" doesn't mean Microsoft has the right key.

Microsoft is worth 11 times' Yahoo's $19.8 billion market cap and could easily afford the purchase. But being able to afford something doesn't necessarily mean you should buy it.

And if something is broken, purchasing it at a discount price doesn't make it a good deal.

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