Microsoft: Pondering the alternatives to Yahoo

Microsoft's Saturday "negotiate or else" deadline for Yahoo has passed with an eerie silence. Yahoo's board is reportedly meeting Sunday--you'd think the company would have met before the deadline, but I guess we're all prone to procrastination. Microsoft CFO Christopher Liddell hinted on Thursday and in a broadcast to employees Friday the software giant will respond "next week," which happens to be now.

All the incremental data on the Microhoo saga can be found on Techmeme, but the real question is this: Who has all the leverage? Despite Yahoo's bluster, it appears Microsoft still holds all of the cards. Microsoft controls its market cap and Yahoo's. Yahoo hasn't come up with alternatives to Microsoft's $31 a share bid (if Yahoo did we would have heard about them). Microsoft may appear desperate for Yahoo but the reality is that it could--and arguably should--walk away and be fine.

Why? Microsoft has more alternatives at its disposal. With the Yahoo bid, Microsoft is going for a big bang but you can accomplish the same goal with a bunch of tuck-in acquisitions.

Stanford Group analyst Clayton Moran weighs Microsoft's alternatives. He notes:

With Yahoo employing "hard-ball" negotiating tactics, we believe Microsoft may publically drop its bid to acquire the company. While a certain portion of Microsoft's rhetoric is likely a negotiating tactic, we also think there is some truth to it. There is a good chance that Microsoft views a proxy fight as long, costly and potentially harmful to business. In addition, pulling the bid could pressure Yahoo.

Moran then outlines Microsoft's alternative targets:

• AOL: Moran argues that Microsoft could pick up AOL and accomplish largely the same thing it's trying to do with Yahoo. In addition, Time Warner is happy to unload AOL and wouldn't give CEO Steve Ballmer nearly as much grief as Yahoo chief Jerry Yang has. With AOL, Microsoft would enhance its revenue, search and ad inventory. The one rub: Google is AOL's search partner and owns 5 percent of the company. You could get around that wrinkle though.
• Fox Interactive: News Corp. and Microsoft reportedly have tinkered with a joint venture to bid for Yahoo. MySpace also has a Google relationship, but if the return is right I seriously doubt Rupert Murdoch is going to let the search giant get in the way.
• ValueClick: Microsoft bought aQuantive, which had been deep in talks with ValueClick before. Microsoft would get reach and ad inventory.
• CNET: OK, now the lump is back in my throat, I'll do the obvious disclosure: CNET is the publisher of ZDNet and I'm already thinking about an MSNBC-ish acronym. MSCNET or something silly like that. I'll play this one straight. Here's what Moran said in his research note: "CNET brings content, advertising inventory and an undermonetized user base of 160 million unique users. But, acquiring CNET may pose a conflict of interest for Microsoft given its technology emphasis. However, Microsoft had a potential conflict of interest with aQuantive's advertising agency but appears to be doing well there."
• Facebook: Microsoft could buy the 98.4 percent of Facebook it doesn't already own. Moran rightly notes that "the price might be too steep and Facebook seems unlikely to sell." But if Microsoft is throwing dough around why not spend it on Facebook?

Moran didn't detail other purchase, but you could obviously add a bevy of other names: Salesforce.com (hell would freeze over perhaps), Digg and dozens of others.