Microhoo? Purchase of Yahoo by Microsoft Could Challenge Google's Dominance

Could Microsoft actually buy Yahoo for $50 billion, making it one of the largest tech mergers and acquisitions ever?

That was the question buzzing around as Wall Street closed out another strong week.

Neither company would comment on reports Friday morning that Microsoft was planning to buy the Internet search company.

Several analysts surveyed by ABC News said they doubted such a deal would go through, while others said it made complete sense and is the only way for anybody to compete with search giant Google.

In March, Google captured 54 percent of Internet searches, according to Nielsen/NetRatings. Yahoo had 22 percent of the market and Microsoft's MSN/Windows Live Search had 10 percent.

The proposed acquisition was reported in Friday's New York Post and The Wall Street Journal.

That alone made Brain P. Bolan, director of research for Jackson Securities, skeptical. "Usually, if you're going to become engaged in a deal like this … you leak the story to The Wall Street Journal. You don't leak the story to the New York Post," Bolan said. "Right off the bat that tells you where this is likely headed."

The Journal reported late Friday that merger talks between the two companies "are no longer active."

"If it didn't make sense six months ago, 12 months ago, 18 months ago, what is the driving factor that makes it make sense today?" Bolan told ABC News.

Bolan said that the two companies have very different work cultures, with Yahoo being "more lax, trying to be more innovative."

"If Yahoo does sell to Microsoft, it is pretty much saying, OK, we cannot beat Google," he said. "We're just giving up. We're throwing in the white flag."

Google has been encroaching on Microsoft's turf, offering word processing, spreadsheet and presentation programs on its Web site. Yet Microsoft has failed to gain a foothold in the Web.

Microsoft is "like a lost tourist" on the Web, said Paul Saffo at the Institute for the Future, who disclosed that he bought Yahoo stock six months ago anticipating a buyout.

Alan Davis, senior research analyst with D.A. Davidson & Co., also questioned if such a deal would work, saying that every six months or so there is speculation of a large takeover by Microsoft. "I'm a little skeptical on a deal," Davis said.

He suggested that Microsoft is probably going to focus on acquiring smaller companies.

In an earnings conference call April 26, Microsoft CFO Chris Liddell seemed to back up that viewpoint. "The remainder of the incremental operating expenses are driven by general increases in costs, as well as unallocated spending related to small acquisitions that we may do during the year," he said.

But not everybody was so quick to write off the deal.

Robert E. Toomey, an equity strategist with E.K. Riley Investments, said he had no idea how likely such a deal would be but said it would be a good proposition for both companies.

Peter Misek, global technology stagiest at Canaccord Adams, said such an acquisition is critical for Microsoft to be a key player on the Internet.

"It is a massive fault of Microsoft's not to be there," Misek said.

Right now, Microsoft has no way of way of gaining a critical audience, he said. "If they don't do something like a Yahoo, they probably need to buy five to 10 smaller companies and stitch them together, which is a considerable risk, and still they may not catch them," Misek said.

"I think ultimately over the next three to six months there will be a 50 to 60 percent chance that this goes down," he added. Within a year, he said there is a 60 to 80 percent chance this deal happens.

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