Yahoo, Microsoft to resume merger talk

NEVER say never must be about the most frequently used cliche in the mergers and acquisitions game, and for good reason.

Some sort of hybrid deal will avert a massive cultural clash

All the discussion about whether Yahoo or Microsoft had blundered worse in the failed recent merger negotiation, and talk of moving on, was never going to be enough to prevent the underlying logic of the combination reasserting itself.

The launch of a proxy fight against the current Yahoo board by shareholder activist Carl Icahn may have been the trigger for the two sides to return to the negotiating table, but the real driver remains the weakness of both the consumer internet's second-ranked and third-ranked players when compared with Google.

Until the details of the new plan are clearer it won't be known whether it holds the same game-changing strategic value as a full merger did.

The type of deal that has been canvassed, which would involve Yahoo essentially handing over its search-linked advertising inventory to Microsoft to manage, and perhaps in time all of its advertising inventory, could have some advantages that the full merger did not.

Some sort of hybrid deal will avert the massive cultural clash between two entrenched, chaotic and arrogant technology success stories that many observers feared would erode so much of the upside of a full merger.

It will also make it easier, in theory, for both firms to hire and keep the talent they need to fight Google, and if necessary to create semi-autonomous internal groups or even spin-offs to focus on the areas where Google is strong (contemporary corporate thinking holds this is the only real way to grow new capabilities inside established technology firms).

A hybrid arrangement would make it much easier for both sides to save face as they seal a mutually advantageous deal that both had said was not needed as recently as last week.

Microsoft's decision to continue with its unveiling of its new web strategy this week, despite the resumption of talks over the weekend, is a good example of this. And finally, a partial transfer of assets or operations into the new joint entity leaves both Yahoo and Microsoft with the strategic flexibility that critics believed the earlier plan would remove.

Of course, a partial merger or joint venture also creates all the usual problems with halfway houses designed by committee and most of all, leaves open the most critical question of who is in control of the joint fightback against Google's control of the online search and advertising markets.

Worst of all, a hybrid deal might not only help the two sides to save face, it could turn out to have no alternative motivation or impact at all - other than offering both management groups a respite from their shareholders.

That seems unlikely, however, given the stakes here.

Whether there is an alternative plan to a merger that is worth the effort should become obvious quickly, though and that answer will be contained in the reaction of Microsoft and Yahoo shareholders, and the reaction or indifference it stirs over at the Googleplex.