Yahoo! Rebuffs Microsoft's Advances

And while investors bid up the value of many small Internet ad companies after Google's purchase of DoubleClick in anticipation of the Redmond, Wash., giant turning elsewhere, only Yahoo! will give Microsoft the muscle it needs to compete online, some analysts argue.

"We believe that across advertising, Yahoo! is the only game-changing acquisition for Microsoft," Goldman Sachs analyst Anthony Noto wrote in a research note last week. Noto said that Microsoft's efforts to build its own search business "have largely failed, and the magnitude-of-scale gains that are required is too large" for the company to achieve by itself.

"Ultimately, gaining scale across the user base in both advertisers and consumers is Microsoft's only chance at beginning to close the monetization gap vs. Google," Noto wrote. Goldman Sachs makes a market in Yahoo! shares.

And while Yahoo! would help Microsoft close in on Google's lead in the search ad business, Microsoft could also help Yahoo! remain the leader in the display ad business that Google charged into with the DoubleClick deal.

"On the display side, adding MSN would be a gigantic coup for Yahoo!'s efforts in building its display publisher network," American Technology Research analyst Rob Sanderson wrote in a research note on Monday. "Combining forces on display ads would create the undisputed juggernaut in the non-search space."