Software giant Microsoft may be on the acquisition trail, according to recent press reports that have mostly focused on the company's possible interest in acquiring New York-based media giant Time Warner. But the more likely scenario is that Redmond, Washington-based Microsoft will make a play for all or part of Yahoo!, the well-known Sunnyvale, California-based Internet portal and search engine, according to other press reports and at least two industry observers. Microsoft and Yahoo! have held talks regarding various options, including the purchase of an equity stake in Yahoo! by Microsoft, according to a recent report in the Wall Street Journal. Those discussions are not currently underway, according to other reports.

A play for Yahoo! would fit Microsoft's new strategy of countering Mountain View, California-based portal and search engine Google's dominance of the burgeoning Internet advertising space, according to Richard Dorfman, the former co-head of Jefferies Group's New York-based M&A group. Dorfman's current investment portfolio includes both Institutional Shareholder Services, where he is a former board member, and Curious Pictures, where he is a co-owner. "Google thinks they're the next Microsoft," Dorfman said. "They're too entrenched for Microsoft just to boot them aside," as Microsoft did to Netscape, he added.

A battle between Microsoft and Google for dominance in online search and online advertising has been widely expected since at least last October, when Ray Ozzie, Microsoft's chief technical officer, wrote a widely noticed internal memo about the coming challenge to Microsoft's licensing business model in the form of a newer model that was focused on "advertising-supported services and software. This model has the potential to fundamentally impact how we and other developers build, deliver, and monetize innovations," Ozzie wrote. "Online advertising has emerged as a significant new means by which to directly and indirectly fund the creation and delivery of software and services," he added. "In some cases, it may be possible for one to obtain more revenue through the advertising model than through a traditional licensing model."

For Microsoft to have any hope of becoming the online search and online advertising leader, it needs to "do a deal," said Dorfman. A Microsoft-Yahoo! deal might make sense from Yahoo!'s perspective, if it concludes it can't overtake Google on its own, Dorfman continued. "It certainly makes sense from Microsoft's perspective."

On the other hand, a deal for Time Warner, the world's largest media company, would be "like buying a cow because you want a glass of milk," Dorfman said, referring to the plethora of Time Warner assets, from cable systems to magazine titles, that Microsoft presumably would have little or no use for. "It's one of the more harebrained ideas I've ever heard," Dorfman said. In summary, "Yahoo! is so much of a better fit," said Dorfman. "It helps them in their battle with Google, it helps them on the online advertising side."

Those sentiments were seconded by Robert Marich, senior editor at Kagan Research. "Time Warner would be hard to digest," he said. At any rate, "Microsoft isn't in those businesses" and has no need to be, he added. With Yahoo!, there's a "lot of synergy."

A Microsoft spokesperson declined comment, citing the company's policy of not commenting on rumours or speculations. A Yahoo! spokesperson did not reply immediately to a request for comment.

by Louis Chunovic