Microsoft Takes Another Look at Yahoo in the Bargain Basement

Thought that the Microsoft (MSFT) bid for Yahoo (YHOO) was dead when Yahoo turned down the $44.6 billion bid? It was... until the stock price dropped so dramatically. Now Microsoft is considering bidding on Yahoo again, perhaps with some partners. And for a market value that is down to $18 billion.

The question is why Microsoft would even bother. The answer is to protect the headway it has made competing with Google (GOOG) in the search market. Because, once another company gets its hands on Yahoo, all deals may literally be off.

Turning down that Microsoft bid was the single biggest mistake that Yahoo's board ever made. Shareholders would have received a 62 percent premium over the stock's price in January 2008. That was a good deal higher than today, as you can see from this Yahoo Finance five-year stock chart (round mark shows early 2008, click graph to enlarge):

Eventually, the two companies would strike a deal in which Microsoft would power Yahoo search and eventually make money off the advertising. Essentially, Microsoft got what it had wanted without having to deal with the structural and strategic mess that Yahoo was.

Things continued to deteriorate at Yahoo to such a state that the board finally fired CEO Carol Bartz and decided that selling the company still sounded like a good idea.

Back in September, it seemed that Yahoo would have trouble getting bidders. After all, the board had proven itself unrealistic in terms of how highly it valued the company. But maybe reality finally set it. And the rumors about possible bids set began, including a rumored three-way partnership between private equity firm Silver Lake, Yahoo investment and frenemy Alibaba Holding Group, and Digital Sky Technologies, a high-profile Russian investment firm.

Once Yahoo is taken over, though, who knows what will happen to either existing partnerships or future extensions? Especially if Yahoo were broken up, Microsoft might find that deal that helped its search standings would unravel.

So, it looks as though Microsoft is back in the running -- possibly with a partner or two. It looks more certain that the Yahoo logo will soon be little more than a memory.