Yahoo battle: who will prevail?

A potentially bloody and protracted battle has begun for Yahoo, which could define how the next generation of the internet evolves, and the role of two of the current giants in shaping it:

• Microsoft.  Microsoft on February 1 unveiled a bid to acquire Yahoo for 44.6 billion dollars in cash and stock -- a 62% premium on the company’s share price at the close of the previous day.
• Google.  Google responded by proposing a strategic alliance with Yahoo, which would see the former abandoning its own search platform for Google's, while the latter would take advantage of Yahoo’s online advertising technology and talent to cement its dominant position in that market.

Microsoft seeks insider status

While Microsoft's Internet Explorer browser long has been the software of choice for surfing the internet, and it has popular e-mail and messaging tools, Bill Gates and his colleagues initially were slow to grasp the role cyberspace would play in everyday life:

• Microsoft has been viewed in Silicon Valley as something of an outsider – a follower rather than an innovator. 
• While acquiring Yahoo might not allow Microsoft to displace Google’s dominant position among search engines, it would allow it to benefit from Yahoo's talent pool, take out a key competitor – particularly in e-mail and messaging – and help it play a more pivotal role developing the next generation of internet applications.

Google counterattack

Google clearly views this prospect with a degree of alarm:

• Having initially expressed concerns that a Microsoft acquisition of Yahoo could violate anti-trust laws, it has subsequently sought to stymie Microsoft's bid. 
• Its proposed alliance would allow Yahoo to maintain its independence, while exploiting the synergies between the two companies that would create a dominant force that would be likely to sideline Microsoft – perhaps turning it into an increasingly marginal player in the next internet generation.

White knights?

This leaves the two big hitters seeking to woo Yahoo's board and shareholders.  Yahoo clearly views the prospect of a Microsoft takeover with alarm, seeking to see it off by courting potential 'white knights' such as Rupert Murdoch’s News Corp, which already owns social networking giant, MySpace.  Even though the latter uses Yahoo for its search advertising, Murdoch was quick to rule out playing such a role. 

This makes the Google proposal the current frontrunner, though Microsoft could counter it with a better offer – 44.6 billion dollars may be a large premium on Yahoo's share price, but given that social networking site, Facebook, recently was valued at 15 billion dollars, there may be scope for a larger bid.

Regulatory concerns

If either of the two finally emerges, it would have an online position, which would be so dominant, and pivotal in determining how the next generation of cyberspace develops, that it would almost certainly raise significant monopoly concerns, possibly sparking antitrust investigations.