Microsoft-Yahoo! merger talks no longer active, report says

NEW YORK — Just after the stock market closed Friday, The Wall Street Journal published an online update dousing its report earlier in the day of renewed merger talks between Microsoft and Yahoo! executives.

The Journal, citing unnamed "people familiar with the situation," reported that merger discussions had occurred "in recent months" but are "no longer active," though other potential arangements between the tech giants are still on the table.

The news of the renewed merger talks, orginally reported in The New York Post, sent Yahoo! shares up nearly 10 percent today. They started trending down at about 2:45 p.m. New York time, however. The Journal's updated story was posted at or before 4:19 p.m.; the market closes at 4 p.m. New York time.

Speculation about a possible Microsoft-Yahoo tie-up met with skepticism Friday from analysts who believe services from the two companies have too much in common.

The Post reported that Microsoft had asked Yahoo! to enter formal negotiations for an acquisition that could be worth $50 billion. Yahoo!'s market capitalization was about $38 billion on Thursday.

Both companies declined comment on the reports, each of which cited unidentified people familiar with the situation.

The Wall Street Journal said in its early report that executives of the two companies are looking at a merger or some other kind of matchup and said the talks appear to be in the early stages. It said the companies explored the idea of combining last year but the talks led nowhere.

David Hallerman, a senior analyst at the research group eMarketer, said he saw many cultural problems and few strategic benefits with a Microsoft-Yahoo! combination.

"There's too much overlap between Microsoft and Yahoo!, and to try to merge the company cultures of two large companies like that in general is hard," Hallerman said.

Hallerman said Microsoft would be better off buying an ad network to beef up its own operations, the same way Time Warner's AOL has seen its advertising revenue grow following the acquisition of Advertising.com's technology and sales force.

Yahoo!, meanwhile, could lose the flexibility it needs to compete if it were to be one division within a larger company like Microsoft, he said.

Industry analyst Matt Rosoff with Directions on Microsoft in Kirkland, said a huge takeover is unlikely, noting that Yahoo! would duplicate services Microsoft's MSN already provides, such as instant messaging and e-mail.

It is possible, Rosoff added, that Microsoft and Yahoo! might be talking about a deal involving only online search advertising. Hallerman said he could see at most a spinoff of Microsoft's MSN online division to be run by Yahoo!.

A combination of two such large technology companies would also be sure to raise antitrust concerns, legal experts say.

With Google Inc. the only other major Internet player besides Microsoft and Yahoo!, eliminating one of those would raise red flags, says Richard Liebeskind, an attorney at Pillsbury Winthrop Shaw Pittman and a former antitrust enforcement official at the Department of Justice and Federal Trade Commission.

"Three to two is a sort of a magic number in antitrust," Liebeskind said.

Microsoft is feeling increasing pressure to compete with Google, which plans to beef up its portfolio with a $3.1 billion purchase of online advertising company DoubleClick.

Microsoft currently trails both Yahoo! and Google in the lucrative and growing business of Web search, even as Google increases its development of Web-based software that directly competes with Microsoft's lucrative Office suite.

Microsoft and Yahoo! each considered buying a stake in AOL in late 2005, but Google ultimately won a search advertising deal and agreed to pay $1 billion for a 5 percent stake in AOL.

The Post story said Microsoft and Yahoo! have held informal talks over the years and said Microsoft's latest approach to Yahoo! signals increased urgency.

Earlier this week, Yahoo said it would buy 80 percent of advertising exchange Right Media for $680 million, increasing its stake in that company to full control.

Yahoo shares surged $2.80, or 9.9 percent, to close at $30.98 today, while shares of Microsoft fell 41 cents to $30.56.