Is Microsoft Saving Yahoo, or Is Yahoo the Savior?

Feb. 1, 2008— -- The tech world got another shakeup this morning when Microsoft announced that it was seeking to buy Yahoo for $44.6 billion.

The unsolicited bid, which represents a 62 percent premium on Yahoo's closing stock price yesterday, comes at a time when Yahoo has been struggling to find its way. Its stock price has been lagging, it has announced layoffs and Chairman and CEO Terry Semel was recently replaced by co-founder Jerry Yang.

Microsoft Chief Executive Steve Ballmer said in a conference call today that he'd personally called Yang last night to notify him of the bid. He also noted that last year Yahoo, under Semel's leadership, rejected a similar overture.

Today Yahoo said in a statement that it would "carefully and promptly" study Microsoft's bid.

So is this the case of a failing technology company, Yahoo, being saved by a larger tech company, Microsoft, because it failed to innovate? Probably not.

Technology analysts said that in addition to it being relatively cheap, consuming Yahoo could provide Microsoft with Web technologies that the desktop software behemoth has not been able to create on its own in its effort to keep pace with Google.

And while Yahoo has struggled, it is anything but dead. Google is now the dominant search engine -- even becoming a verb in the common lexicon -- but Yahoo still draws plenty of advertisers and some on Wall Street are happy with the direction Yang has taken the company in.

And Yahoo is a lot more than a search engine. It offers community groups, sports fantasy leagues and strong financial market data. Plus, Yahoo has millions of registered users.

Technology companies rise and fall according to their ability to innovate quickly. Think about Netscape. It's Internet browsers once dominated the market, but the company faltered when many Netscape features were adopted by competitors. Netscape is now part of AOL.

While it might take a carmaker half a decade to dramatically overhaul its line, a tech company can change the competitive landscape in months with one blockbuster product.

"Technology change is much more rapid than in most other industries," said Sid Parakh, an analyst with McAdams Wright Ragen. "You can be outdone by your competitor pretty quickly even if you are the industry leader."

Parakh said Microsoft would benefit from assuming Yahoo's Web functions, and Yahoo's cheap stock price is driving the potential acquisition.

Microsoft executives spoke this morning about the potential added innovation of having the two research and development teams working together. Of course, whether the two teams would be more productive overall remains to be seen, but as the teams try to combine Web applications and desktop applications it could prove beneficial to have both parties in the same room.