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Report: Microsoft, Yahoo Merger Talks Over

UPDATED: The discussion about a reported merger between Microsoft and Yahoo today has ended. According to unnamed sources cited by the Wall Street Journal, Microsoft broached the merger topic months ago and Yahoo quickly rejected the deal. The deal remains dead.

A Yahoo spokeswoman told internetnews.com the company refused to comment on "rumors or speculation." Microsoft did not respond to requests for comment.

Microsoft's motivation to merge with Yahoo likely stems from a series of Google successes -- its launch of Web-based applications for small businesses, its outbidding of Microsoft for advertising firm DoubleClick and another quarter of spectacular financial results -- has Microsoft hot for Yahoo's Web presence once more.

Yahoo's current market capitalization is $44.75 billion. In morning trading, Yahoo's share price rose five points, or 17 percent, to a near 52-week high of $33.23 per share.

Apparently, merger talks are just the cure for Yahoo after weak first-quarter financial results caused investors to bail on the company in mid-April. The problem then was that Yahoo did not exceed expectations for its new advertising platform, code-named Panama.

When reporting Yahoo's 2006 financial results, CFO Susan Decker said Yahoo did not expect Panama to positively impact its profits until the second quarter of 2007. But early reports of the advertising platform's success raised investor expectations. Despite positive reviews from Yahoo advertiser customers, however, those expectations were not met and the stock tanked. Until today's merger talks.

Forrester Research analyst Charlene Li predicted that a merger would be pointless.

On her blog, she wrote that while Microsoft needs the stronger Web presence Yahoo offers to counter-balance the declining importance of its Windows operating system, Yahoo would only benefit from Microsoft's technical expertise in Web services and APIs.

Beyond satisfying those needs, Li considered a potential merger a mess in the making, especially considering the culture clash likely to ensue.

"Egos and innate disdain from being competitors over the past decade would have to be set aside. Geographic distances (Seattle to Sunnyvale, Calif.) would have to be bridged. And most importantly, a new company ethos, leadership and culture, would have to be created. I'm not hopeful that executive time spent on company politics will be minimal," Li writes.

And while Microsoft and Yahoo executives claw at each other, Li said there's nothing to suggest Google won't continue to outpace the newly formed entity as much as it does now.

If the merger won't help Microsoft or Yahoo compete with Google, Li concludes, what's the point? She writes, "I believe that a merger won't be in the works anytime soon."