Microhoo careens toward closure: Assessing the moving parts

Updated: The Microsoft-Yahoo saga appears to be heading toward closure, but there are multiple loose ends to tie up. Microsoft has set the pace with a three week deadline--quickly becoming two weeks--for Yahoo to join negotiations, but Jerry Yang and company are proving that they have more strategic alternatives in their bag of tricks.

Here's the recap for those keeping score at home (Techmeme). On Saturday, Microsoft CEO Steve Ballmer gave Yang a three-week deadline or face a proxy war. On Monday, Yahoo told Microsoft to raise its price or shut its yap. By Wednesday, Yahoo was partnering with Google on a limited ad test designed to scare Microsoft into raising its price. Microsoft said Yahoo was reaching and running into antitrust trouble. Meanwhile, Microsoft was reportedly talking to News Corp. about a joint bid for Yahoo that would combine MySpace, Yahoo and MSN. Talk about antitrust headaches. And I almost forgot the other wrinkle: Yahoo may merge with AOL instead of Microsoft. According to The Wall Street Journal, Yahoo's board meets Friday to discuss the Microsoft bid and its other alternatives--including an AOL deal.

Got all that? It's all great theater, but Microsoft and Yahoo are really playing a big game of chicken that the portal may actually be winning. It appears that if Microsoft really wants Yahoo it will have to raise its $31 a share price. Here's a look at the moving parts in the deal and a little handicapping:

Is outsourcing to Google a bluff or a legit alternative? Yahoo announced a two-week limited ad deal with Google designed to end right about the time Microsoft's deadline hits. Partnering with Google was viewed as a sure fire way to nuke the Microsoft bid. But the Google gambit only works if Microsoft believes it. Would Yahoo go all the way with Google? It's doubtful. Brian Pitz, an analyst with Bank of America, says that a Google search deal wo

uld boost search revenue and earnings in the short run, but hurt Yahoo in the long run. Pitz writes:

We believe it may not make economic sense for YHOO and its advertisers to continue running its own search ad system (Panama) to solely support advertising on YHOO's search affiliate partners. Moreover, we believe it could be difficult for YHOO to re-sell GOOG sponsored listings to its network of affiliates, as they would likely move directly to GOOG or MSFT over time. Ask.com currently employs GOOG sponsored listings on Ask and resells these listings on its affiliate network, with the latter's margins being pressured.

The antitrust game. Both Microsoft and Yahoo are talking a ridiculous amount of antitrust smack. Yahoo says a Microsoft bid will raise antitrust concerns yet turns around to potentially outsource search to Google in a deal that--you guessed it--would raise antitrust concerns. Microsoft is playing the antitrust card hard in a move that's just as comical given the software giant's own antitrust issues. Meanwhile, News Corp. and Microsoft may be teaming up with on a joint Yahoo bid. A News Corp.-Yahoo-Microsoft deal would also raise a few eyebrows.

Rupert Murdoch

switches sides. Murdoch has talked with Yahoo about a MySpace deal. Then Murdoch said it doesn't make any sense to bid against Microsoft. Apparently, Murdoch now thinks bidding with Microsoft may make some sense. If reports are true that Microsoft and News Corp. are talking about a joint bid for Yahoo that's a sure fire signal that Ballmer is looking to raise his bid in a way that doesn't cause a revolt among the software giant's shareholders. I wouldn't be surprised if News Corp. is trying to unload MySpace at the top of its valuation.

Yahoo and AOL talk a deal. And just to throw another wrinkle into this soap opera Yahoo is reportedly in heavy discussions with Time Warner about an AOL merger. Time Warner would love to ditch AOL--a never-ending migraine. Yahoo just wants to either outrun Microsoft or get a nice payday. Strategically, I don't see what a Yahoo-AOL deal really gets anyone. Time Warner gets an exit from AOL, but Yahoo would have to integrate ad networks and resuscitate a brand that has been on the ropes for years. A Yahoo-AOL deal doesn't sound like a long-term winner.

Bottom line: This Microhoo soap opera has been a hoot, but the clock is ticking. Shockingly, Yahoo may actually get Microsoft to up its price. Stay tuned.