Yahoo, Microsoft: Off again ... on again?

Just when it seemed that their stormy relationship had ended, Yahoo and Microsoft may end up reconciling and coming to terms on a merger sooner rather than later

On the other side of the fence, despite his bluster and insistence that a Microsoft-Yahoo combo would "deliver superior value to our respective shareholders, creating a more efficient and competitive company that will provide greater value and service to our customers" - in an ultimatum to Yahoo's board on April 5 - even Microsoft CEO, Steve Ballmer, seemed to lose the thrill of the chase the longer Yahoo held out.

By the waning days of negotiations, according to the New York Times, Ballmer appeared ambivalent to Microsoft's infatuation with Yahoo. "Should we just forget it?" he asked aides about the deal, the New York Times reported.

Forget it. Microsoft seems to have done that, and several executives - including Microsoft founder and chairman, Bill Gates - have already asserted publicly that the company has moved on and is ready to go it alone to improve its Internet business.

"Microsoft is focused on its independent strategy," Gates said, speaking in Tokyo.

Still, some believe Microsoft, which has bungled its Internet and online advertising strategy so far, may need Yahoo just as much as Yahoo needs them.

Andrew Brust, chief, new technology at consulting firm Twentysix New York, wrote in a blog posting that Microsoft's struggling Internet business - and the fallout from problems surrounding its Windows Vista OS - make a deal with Yahoo crucial to the company's future.

"They need this deal, despite Steve Ballmer's protestations to the contrary, and despite the prevailing wisdom that the merger would be unsuccessful," he wrote. "I don't see a good alternative acquisition. ... If Microsoft fails here, and continues to mishandle its damage control around Vista, then the company will be in a bad place. The setback won't be irreparable, but it will be significant."

Financial analysts, too, believe a deal may still be imminent. In a research note earlier this week, Piper Jaffray analysts Gene Munster and Vivian Li wrote that there were still many pieces and players that needed to sort out before the dust truly settled.

"We continue to believe that Microsoft needs help to create a formidable online advertising presence and believe Yahoo still makes the most sense as an acquisition," the analysts wrote.

A Citibank research note by analyst Mark Mahaney, published on Tuesday, also mentioned that a deal between the two companies is a possible scenario for Yahoo's future.

For that to happen, Microsoft and Yahoo would have to see the error in their ways now that they've parted. If fallout from Yahoo shareholders proves too daunting for the company's board to handle, and Microsoft can't see another way to quickly revive its Internet business, the potential is there for a Microsoft-Yahoo partnership to blossom again.

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Elizabeth Montalbano

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