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Sun 10 Feb 2008 05:57 PM

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How much will Microsoft pay to stay in the game?

The trouble with Microsoft's bid for Yahoo could prove critical for the future face of online business.

News from the US is that Yahoo's board is likely to officially refuse Microsoft's takeover bid on Monday, setting the stage for a messy few months of negotiations and dealings, assuming Microsoft want to continue.

The bid from Microsoft was never going to be an easy win, especially not with the amount of regulatory scrutiny that Microsoft attracts, but movement on the financial markets this week have had an outcome that Microsoft wouldn't have predicted - its 62% premium on Yahoo's share price just wasn't enough.

When Microsoft announced its bid, Yahoo stock took off, while Microsoft stock dropped by 12%. The deal, which would have been structured with cash and Microsoft stock, is now only worth about $29 per share, which the Yahoo board are likely to reject as too little. Which leaves Microsoft with the choice of digging deep in its pockets to make a better offer, going fully hostile, or backing off altogether.

It's difficult to see which way it might go. Microsoft has already admitted that it would borrow to finance the Yahoo deal, and some analysts felt that the initial offer was generous enough at the time. Microsoft is also reported to have met with corporate investor Capital Research and Management, which holds around 11% of Yahoo to discuss the deal.

The Yahoo bid marks a bold move by Microsoft to gain serious Web 2.0 share, and also indicates just how seriously it takes competition with Google in the long term. Google is the undisputed leader of online ad markets, and the company consistently shows off its innovation chops in the segment.

On the other side of the table, Google was equally rattled at the prospect of expanded competition with Microsoft, immediately going on the defensive by offering to circle wagons with Yahoo, and crying foul to the regulators.

For Yahoo's part, it's hard to imagine their board (and the tech staff that provide so much of the potential value of the deal) being able to swallow their pride and simply allow themselves to get gobbled up by Microsoft, regardless of any assurances from Steve Ballmer that the Yahoo brand would live on. Yahoo may have declined in recent years, but it's still regarded as one of the main players on the web, and capitulation to Redmond was not an attractive prospect. But if it remains independent, Yahoo still has a job to do if its going to stay relevant in the online market.

So for now, Google will have to watch from the sidelines while Yahoo!, Microsoft and most importantly the investors and regulators decide this round, and decide how the playing field will look for Google versus Microsoft in future.

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