Microsoft Takeover Buzz Surrounds Yahoo Again as Cost Cutting Continues

A story in this morning's New York Post - published by the would-be owner of the Wall Street Journal, which followed up on the story - has speculators buzzing yet again, stating #3 search provider Microsoft may be willing to pony up as much as $50 billion to buy out #2 Yahoo.

The Journal ran with the story this morning, crediting the Post with the revelation, and perhaps in so doing testing out the new pecking order in the business press, as Post publisher and News Corp. CEO Rupert Murdoch continues his efforts to lure shareholders of WSJ publisher Dow Jones into a takeover deal. Earlier this week, Murdoch offered Dow a premium well above its market price for shares.

Normally, that underlying fact might cast clouds of suspicion over the story's validity, along with the relative veracity of the notion that the two companies are "renewing" merger talks held last year - a notion which both companies earlier officially denied. But who needs facts when juicy rumors are enough to stir investors? By 11:20 am this morning, shares of Yahoo were trading up 19% in value on the NASDAQ Exchange.

The WSJ cited its own unnamed sources as saying the only folks at Yahoo who might be opposed to a merger with Microsoft would be its senior executives, including CEO Terry Semel and co-founder Jerry Yang. Yang's distrust of Microsoft is actually part of the historical record, having famously told a CNET reporter in 1997, "You never, ever want to compete with Microsoft. And even if they want to compete with you, you run away and do something else." That phrase has been used to open many a PowerPoint presentation by product managers proposing an "end-around" strategy to best Microsoft in one market space or another.

Also weighing against such a deal is the fact that Yahoo has just announced its intention to acquire the remaining 80% stake in online ad service provider Right Media. Yahoo is currently one of Right Media's customers, and so is Microsoft. The US Federal Trade Commission has adopted a more critical approach to weighing the efficacy of mergers between providers and their own clients, in the wake of the disastrous AOL Time Warner merger. There, exchanges between the merged entities own divisions were counted as revenue, in an accounting scandal whose impact to this day works against AOL's comeback strategy.

Yahoo actually did have an announcement to make this morning, though it may be postponing that news in order to keep a lid on the merger rumors. If Yahoo is caught saying nothing in public about the Post story, it might bring a premature end to its stock rise.

In any event, in his TechCrunch blog yesterday, Michael Arrington wrote that he was personally told by Yahoo senior vice president Brad Garlinghouse that Yahoo will close its Yahoo Photos service, to devote its resources in the photo sharing space to Flickr, a site Yahoo acquired in March 2005.

Yahoo had been operating both photo sharing sites separately, and Arrington cites comScore Networks ratings in past months showing Yahoo Photos with more than double the unique visitors at this time last year - 9.1 million versus 4 million for Flickr - but with Flickr's rise surpassing Yahoo Photos' fall last month, with Yahoo at 7.5 million and Flickr at 8 million.

As Garlinghouse told Arrington, Yahoo's plan was to announce that rather than merge both services' user bases together, Yahoo would adopt the thoughtful strategy of offering current Photos users channels for choosing Flickr or other competitive services, such as Snapfish or Shutterfly. Such a move would demonstrate Yahoo's internal belief that you don't smash two services together just to mash their customer base into a single, amalgamated paste.

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