Is Yahoo is best way for Microsoft to spend its cash?

Microsoft is likely to prevail in its Yahoo bid -- and most likely without raising its offer. But just because Microsoft can buy the No. 2 search vendor doesn't necessarily mean it should.

Those are the results of a new poll of Wall Street analysts by Reuters. Reuters polled eight Microsoft analysts and 14 Yahoo analysts on their latest views of the prospects of the Microsoft acquisition of Yahoo. Eight of the eight Wall Street analysts who closely follow Microsoft predicted the deal would transpire, as did 14 of 15 of the Yahoo analysts.

The Reuters poll found Wall Street brokers who follow either company remain convinced that Microsoft will prevail in its takeover. Eight of eight Microsoft analysts surveyed and 14 of 15 Yahoo analysts believe Microsoft will get the deal done.

The part of the findings I was most interested to read:

"While all the Microsoft analysts in the poll believe a deal will get done, there was some argument over whether this is the best use of Microsoft's cash reserves, which stood at $21 billion at the end of December.

"Microsoft, which has predicted the (Yahoo) transaction will break even or be accretive in the second full year after the deal's closing, is expected to dip into a good chunk of its cash and issue some debt to finance the Yahoo acquisition.

"Analysts argue that the short-term return on an investment in Yahoo does not match that of money reinvested in the software maker's own operations or other, smaller acquisitions. Longer-term the return may be better, but there is significant risk in combining the companies that cannot be overlooked.

"The Yahoo acquisition is 'absolutely not' Microsoft's best use of cash, said Morningstar analyst Toan Tran. The money it is using for Yahoo could be put toward several smaller Web acquisitions that carry less risk, he said."

The Reuters story claims that even if Microsoft depleted its cash reserves, it can "easily rebuild its bank account."

Microsoft sure seems to be spending like crazy on acquisitions lately (especially advertising-related ones). And it needs to keep more than a little pocket money on hand for those pesky fines and lawsuits that seem to keep materializing.

I am still not not a backer of or believer in Microsoft's Yahoo acquisition. I understand Microsoft needs ad inventory and a bigger share of the search market. But $44 billion (or, as the value now stands, $41 billion) sure seems like a lot to spend on a company which has a whole lot of overlap with Microsoft.

Have you changed your opinion on Microsoft's Yahoo bid since it was announced on February 1? If so, what led to your shift?

(Thanks to WinBeta for the original Microsoft-Yahoo poll link.)