Update:

The latest version of the Wall Street Journal story at 4:19 on Friday afternoon says that the talks between Microsoft and Yahoo “are no longer active,” according to the paper’s sources — although “the two companies may still explore other ways of cooperating.”

Original post:

I wonder if Rupert Murdoch has any shares in Yahoo he’s trying to get rid of. Just kidding 🙂 But now would be a pretty good time to unload them. The New York Post ignited a firestorm of rumour this morning — and lit a fire under Yahoo’s share price too — with a story saying Microsoft is back in merger talks with the Internet portal. That pushed Yahoo’s moribund stock up by 17 per cent or so, adding about $6-billion to its market cap.

As the Wall Street Journal points out in its story, the combination of Microsoft and Yahoo is not a new idea. The two companies were reportedly talking a year or so ago about a possible deal, and now those talks have apparently been revived. But does it make any sense? That depends on how you look at it. It makes sense when you consider that Microsoft’s search and related assets are running a distant — and I mean distant — third in the market. And Yahoo, for all of its faults, is a big property with a snappy new engine behind its search, which is (theoretically) supposed to close the gap with Google.

That’s the “glass is half full” argument. The half-empty argument is that both Microsoft and Yahoo are lumbering behemoths with hardly an agile bone left in their sclerotic bodies. Most of their problems stem from the fact that they have accumulated immense bureaucracies — a big part of the impetus for Yahoo exec Brad Garlinghouse’s infamous “peanut butter” manifesto — and a collection of legacy businesses that keep getting in the way.

They are like icebergs: not only is nine-tenths of them unseen, but they are slow-moving and difficult to steer. Impressive? Yes. Powerful? No doubt about it. But fast, or nimble or imaginative? No. Roping them together would do nothing but compound their problems.

Further reading:

Paul Kedrosky doesn’t think the merger would be a good thing, even though he has been speculating that Microsoft would probably take a run at Yahoo for some time now. Even Henry “I used to be a famous Wall Street analyst” Blodget doesn’t like the idea. And Charlene Li of Forrester Research takes a look at both sides of the argument here. Seamus McCauley puts it well in his blog post at Virtual Economics: Yahoo plus MSN does not equal Google.