Microsoft may seek other deal to fight Google

By Anupreeta Das - Analysis

SAN FRANCISCO (Reuters) - Microsoft Corp could seek a variety of deals after walking away from Yahoo Inc, but few would be comprehensive enough to let it challenge Google Inc's domination of online advertising.

When Microsoft Chief Executive Steve Ballmer called off talks with Yahoo on Saturday after the Web company rejected his $47.5 billion offer, he gave up what he and investors saw as the fastest way to grow quickly in advertising and online services to take on market leader Google.

"Ultimately, our goal is to build the industry-leading business in search, online advertising, media, and social networking," Ballmer wrote in a Saturday letter to employees, obtained by Reuters.

"Although the acquisition of Yahoo would have accelerated our ability to deliver on our strategy in advertising and online services, I remain confident that we can achieve our goals without Yahoo," Ballmer wrote.

Ballmer said Microsoft could go it alone, but a likelier scenario would be to use some of the cash it dangled in front of Yahoo to make smaller acquisitions or strike up partnerships.

It could form a tie-up with Time Warner Inc's AOL unit or News Corp's Fox Interactive Media unit, which includes MySpace, to draw advertising to its own Web properties.

AOL executives contacted Microsoft about a possible tie-up last month after Ballmer set a three-week deadline for Yahoo to agree to a deal or face a hostile battle, a person briefed on those discussions said on Sunday.

News Corp has also reached out to Microsoft in recent weeks to explore possibilities, including bidding for Yahoo jointly, sources previously told Reuters.

An AOL official was not immediately available for comment.

"A partnership with or acquisition of News Corp's Internet activities or AOL would be a start" in leapfrogging Google, said Peter Misek, an analyst who follows Microsoft for Canaccord Adams.

Google sites had about 590 million unique visitors in December, while Microsoft sites had 540 million and Yahoo's had 485 million, comScore data show. By comparison, Time Warner properties, including AOL, had only 274 million visitors, and Fox Interactive Media sites had 158 million visitors. Arguably, a Microsoft partnership with AOL or FIM would not bring the same numbers as a Microsoft-Yahoo combine would.

LOTS OF LITTLE BUYS

Microsoft could also go on a shopping spree, buying start-ups that build sophisticated search and online advertising platforms to cobble together a challenge to Google, said Peter Falvey, a banker at Revolution Partners, a technology-focused investment bank.

"They could buy a lot of interesting start-ups and use their marketing muscle," Falvey said.

But none of these options would provide Microsoft the scale it needs to compete effectively against Google.