Click here for my initial analysis of the Yahoo buyout by Microsoft

With Yahoo rejecting Microsoft’s initial offer the ball is in Microsoft’s court. The letter from Ballmer seems to suggest that if the $31 bid is rejected that MSFT will go to Yahoo shareholders. I still think this deal can be done at a price between $35-$38. Microsoft could easily sell off the non-core assets of Yahoo to pay for the increase, Will it? As a Microsoft shareholder, I hope not. There are no other buyers for Yahoo and existing shareholders will push for a sale to get the 62% premium.

Should Microsoft Wait?
Some people have suggested that Microsoft can take the offer off the table. They can then buy Yahoo cheaper in a year’s time. The problem is with Google holding 56% market share and increasing market share every quarter there is very little time left. The proposed buyout will take 2-3 quarters just for Regulatory approval, add in another year to integrate Yahoo and MSN. If they wait for a year before they try to buyout Yahoo cheaper, then its almost 3 years that Google will have to improve and consolidate its lead. If Google reaches 70-75% market share the Search/Text Ads battle is over. The only thing that could break Google’s domination with 75% market share would be a revolutionary search engine that provides dramatically better results than Google.

Is Search the complete story?
While everyone focuses on search and text ad’s and Google’s lead in that market. There is something most overlook, the banner displays and rich content ads. Yahoo holds a big lead over Google in the Banner Ads. Microsoft could use Yahoo to build a big lead over Google in the banner Ad’s market. Microsoft may feel they can use the Aquantive platform to boost revenue from Yahoo sites faster than most people think. Microsoft may also be interested in the mobile platform Yahoo has developed. Their interest in the mobile ad platform seems obvious with todays purchase of Danger.

Disclosure: I own shares of Microsoft