A Messy Marriage

The announcement of Microsoft's $44.6 billion bid for Yahoo! may have come as a Friday morning surprise, but it is not altogether unexpected. Such a tie-up has been the subject of speculation over the past 18 months, ever since the companies discussed collaborating in late 2006.

On paper, both companies need the sort of jolt a megamerger could provide, albeit for different reasons. Microsoft famously missed the advent of the Web and has long been playing catch-up with Web media companies that have created a $40 billion market for online advertising. Yahoo, though one of the largest of those Web media companies, has been struggling to make headway against market-leading Google.

A tie-up between the two would give Microsoft a substantial chunk of online advertising revenue in a single swipe, in return for providing Yahoo with the software resources to develop new services, especially in the emerging market for video and mobile. That combination would allow Microsoft to chip away at Google's lead, especially in search advertising.

Make no mistake; this deal will close. The $31 per share offer represents a 62 percent premium over Yahoo's market close Thursday. It was money that trumped all else in News Corp.'s bid last year for Dow Jones, and that will be the case here as well. Friday morning, Yahoo opened at $28.70 a share, a clear vote of confidence by the markets that the tie-up would go through.

As for anti-trust concerns, there will be hearings and teeth-gnashing, especially in Europe, where Steven Ballmer and company remain the bugaboo of the technology industry, despite having settled their issues in the United States long ago. But given that a combined Microsoft-Yahoo will still be only about two-thirds the size of Google when it comes to Internet businesses, it's unlikely regulators will kill the deal.