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By Tim Ferguson, 9 May 2007 10:12

NEWS

Any tie-up between Microsoft and Yahoo! could come with a host of complications, according to analysts - but if it happened it would have a big impact on Microsoft's strategy.

Talk of a potential Microsoft bid for Yahoo! has set the tech rumour mill spinning wildly.

According to a New York Post report, Microsoft recently intensified its courtship of Yahoo!, which the paper claimed follows a spurned offer to buy the online giant a few months back.

Neither Microsoft nor Yahoo! would comment on what Microsoft described as rumour and speculation, and since the initial flurry of rumours many industry watchers now think the speculation may be over-hyped. But according to analysts, a strong motivating factor for the two companies is the challenge of Google. As David Bradshaw principal analyst at researcher Ovum told silicon.com: "[Google's] a very substantial threat, as it is taking such a large part of the online advertising space."

In December 2006, Google sites captured 48.3 per cent of the US search market, with Yahoo! in second place ranking with 27.5 per cent of US searches, followed by Microsoft sites (10.9 per cent), according to researcher comScore. And as well as leading the search market Google is expanding on other fronts - such as Gmail and other online tools which increase its competition with Microsoft.

Analyst group TBR predicted the growing strength of Google could convince the Redmond giant to take the leap and purchase Yahoo!.

It said acquiring Yahoo! would provide an "immediate boost to all aspects of Microsoft's online strategy".

TBR said such an acquisition could have an impact beyond the online advertising market - which is a small part of Microsoft's overall business. Increasingly software as a service is becoming more of an issue, and a deal with Yahoo! could be part of a move away from a desktop-based software model to a internet-enabled model.

Acquiring Yahoo! would significantly boost Microsoft's capabilities, while the combined client and consumer base could generate a viable competitor to the search engine giant, according to Datamonitor analyst Ri Pierce-Grove.

But as well as the potential upside, Pierce-Grove said the integration of Yahoo! into Microsoft could potentially present "thorny cultural and technological challenges".

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This is why Ovum's Bradshaw doesn't reckon there's a deal on the cards.

He said: "I think it's highly unlikely that [Microsoft] would do this - Microsoft has tended to shy away from large acquisitions." Yahoo! would be an, "integration nightmare" - and suggested that a merger could attract some unwanted regulatory attention due to its sheer scale.