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Do You Yahoo? Microsoft Does

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Is the hefty premium Microsoft paid indicative of overly pessimistic valuations for technology companies?

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It wasn't so long ago that the business world seemed united in its attempt to bring down what some call Microsoft's (MSFT) Evil Empire. Now, with its takeover bid for rival Yahoo (YHOO), the software giant has officially gone from hunted to hunter.

The deal makes snazzy headlines to cover the first loss in nonfarm payrolls since August of 2003 and yet-unresolved turmoil in the credit markets, but the two companies have been talking for over a year about a proposed merger. Yahoo has repeatedly shunned Microsoft's overtures, choosing instead to focus on internal reorganization to revitalize its slumping brand. In the end, Microsoft resorted to making a technically hostile bid for Yahoo, putting to use some of the $7 billion on its balance sheet in the $44.6 billion offer.

There are two pressing questions the announcement of this deal raises. The first – and maybe most obvious given the ironic timing of the deal – is Microsoft's desire to grow its online presence and take market share away from Google (GOOG).

Google dominates the online search space, with over 56.3% of all searches according to the latest Nielsen ratings. Yahoo comes in second with 17.7% of searches and Microsoft third with 13.8%. And while a united Microsoft-Yahoo would still barely tally half as many searches as Google, Microsoft has been slowly chipping away at the gap between the two companies. Of the three, Microsoft was the only to increase its search share from the previous month and has nearly doubled its share since December of 2006.

The second question – and the one that will echo outside the world of clicks – is what the deal means for the technology sector going forward, and if the hefty 60% premium Microsoft paid is indicative of overly pessimistic valuations for technology companies. Minyanville contributor and senior MarketWatch columnist Herb Greenberg warns investors not to glean too much from the deal:

This is a strategic offer by a cash rich company going through menopause and looking to blossom in its next phase of life….[this] is a single-headline event, driven by one wealthy company's strategic needs, not a reflection of life returning to the way it was before the bubble popped.

Early indications of the Justice Department's interest in examining in the potential anti-trust implications of the deal mean we may have to wait for months to find out the true repercussions of the merger.

Hoofy sees this deal as an indication that the worst of the credit crunch is behind us, fears about an economic slowdown are overblown and cheaper money will refuel the buyout boom that buoyed stocks through the middle of last year. Our bovine friend may be proven right in the near term, but the door to the credit market moves closer to shut each day, and until that changes Hoofy would be best to keep his gloating to himself.
No positions in stocks mentioned.

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