Venture capitalists aglow over Microsoft-Yahoo

By Anupreeta Das - Analysis

SAN FRANCISCO (Reuters) - A combination of Microsoft Corp. (MSFT.O: Quote, Profile, Research, Stock Buzz) and Yahoo Inc. (YHOO.O: Quote, Profile, Research, Stock Buzz) may create new dealmaking opportunities for venture capitalists seeking to fund or sell technology start-ups.

The combined entity could be even hungrier for acquisitions as it races to catch up with Google Inc (GOOG.O: Quote, Profile, Research, Stock Buzz) in the lucrative markets of online advertising and search tools, venture capitalists said. The deal could also create a wave of new start-ups by departing Yahoo employees.

Furthermore, the emergence of a stronger, well-heeled and aggressive competitor would actually help drive up prices for start-ups, even though the $45 billion merger would also eliminate a potential suitor for such companies.

Yahoo could bring a culture of bold acquisition strategies and entrepreneurship that would benefit Microsoft, a company with a reputation of being slow and conservative on the acquisition front.

"It's an opportunity for Microsoft to change their behavior pattern and improve their ability to compete," said Mike Kwatinetz, general partner at Azure Capital Partners. "If they do that well -- and maybe this acquisition will push them toward that change -- there will be a huge positive for Microsoft and the start-up community."

Although Yahoo has been an active acquirer, typically buying up small start-ups, its stock price has recently plunged and it lags behind Google in search engine market share, owning about 23 percent compared to Google's 58 percent.

If Yahoo were to remain independent, it could continue to lose market share and its financial horsepower, thus making it a less aggressive acquirer, said Bryan Stolle, partner at Mohr Davidow Ventures. "It's better to have two strong combatants," he added.

For venture firms, which make financial bets on promising start-ups and hope to recover their investments through a sale or an initial public offering, aggressive companies drive up deal prices. In recent years, firms made more money by selling companies rather than taking them public.