Why Microsoft Needs Yahoo!

Although Yahoo!'s soaring stock price, which has climbed about 35% from its October lows to about $32, would make a deal more expensive for Microsoft, the stock was actually trading at around $33 when Microsoft was originally eyeing the company.

Moreover, the stock price has climbed because the outlook for Yahoo!'s Panama ad ranking system seems bullish, meaning that Microsoft would be paying for a company that seems to present fewer question marks than before.

While skeptics would argue that Microsoft is hesitant to make large acquisitions, the company had given serious thought to acquiring software marker SAP. With a market cap of $56 billion, SAP is 25% bigger than the $44 billion of Yahoo!. Yahoo! would certainly be within reach if Microsoft wanted the deal.

Google's latest encroachment puts Microsoft under more pressure to make big moves that strike back at Google's home base. But acquiring other significant players in the search space would be tough.

Ask.com, which commands 5.4% of the market, is owned by IAC/InterActiveCorp(IACI). Buying it from IAC would be nearly impossible, however, because Barry Diller has reiterated that Ask is the glue of his Internet conglomerate.

And Time Warner's(TWX) AOL, which has a 5% market share, has already announced a number of partnerships with Google, including a $1 billion payment that would give Google a 5% stake in the company.

That leaves Yahoo!, a company with fewer strings but more to bring to the table when it comes to search. Even barring an outright acquisition by Microsoft, Google's intensifying onslaught would tip the balance more in favor of Yahoo! if any partnership were struck.

Either way, Google's digging into its new enemy will likely end up benefiting its old one.

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