Reaction to Microsoft Corp.'s [MSFT] $44.6 billion hostile attempt to acquire Yahoo! Inc. [YHOO] was all over the place in the wake of Friday's big news, but one thing is clear: Steve Ballmer and Co. are pulling out all the stops to catch up to Google Inc. [GOOG] Microsoft finally made the big, bold move -- which everyone seems to agree needed to happen in one form or another -- but perhaps it should have been a bit more forward-thinking.

Rather than buying a struggling No. 2 player that arguably may not greatly improve Microsoft's existing offerings, shouldn't Ballmer and Co. have placed a bet on a company whose offerings will be big in three or four years?

Still, uniting the second- and third-place players in Web search, and two of the leading Internet advertising companies, would grant Microsoft a critical amount of scale to do battle with Google. But that assumes that Microsoft can make the deal work. Integrating companies with cultures as different as Microsoft's and Yahoo!'s, especially if there are hard feelings remain over an unsolicited bid, will be challenging. Worth noting that, unlike Microsoft's earlier acquisitions, there's a lot of overlap in the companies' offerings, which could require some products to go.

First things first, though: Yahoo! has to come to the table. It might not have much choice now that the potential deal is finally out in the open, though Yahoo! has been reluctant in the past. Microsoft CEO Ballmer indicated in his letter to Yahoo!'s board that the company's had held talks a year ago. It was unclear Friday what Yahoo!'s response would be to the hostile overture, but in many ways, Microsoft's timing, at least, seems pretty good:

• At $31 per share -- a 62% premium to Yahoo!'s closing price Thursday -- Microsoft is offering a handsome premium to Yahoo! shares, which have lost more than 40% since last fall. Sure it falls short of Yahoo!'s 52-week high of $34.08 reached last October, but the company's current struggles don't presage a climb in value any time soon (of course, Yahoo!'s shares were up around 50% in early afternoon trading Friday on the offer news).
• Yahoo shareholders are beginning to lose faith in CEO and co-founder Jerry Yang, who hasn't produced any magic -- or even really articulated a plan -- to turn the company around since he took over from former chief Terry Semel in June 2007.
• Turning Yahoo! around is going to be that much tougher as the economy slows down.
• With the size of Microsoft's offer, other suitors are unlikely to emerge.

 But it all still boils down to the fact that the hard part comes after the deal closes. Microsoft will have to not just absorb Yahoo!, but also use the acquisition as a springboard for growth. As a note from the 451 Group summed it up this morning, Microsoft would get a stronger Internet
search and many valuable Web properties from Yahoo!, but it might end up with offerings "no better than Google's." - Olaf de Senerpont Domis

See Feb. 1 story from Tech Confidential
See Jan. 30 story from Tech Confidential
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