Does a MicroHoo deal make sense now?

Three-and-a-half years after Microsoft (s MSFT) proposed a takeover of Yahoo, (s YHOO) the software giant is taking another look at the company’s financials. With a nondisclosure agreement in place (as reported by DealBook), Microsoft now officially joins a list of potential bidders for Yahoo that includes Silver Lake Partners and TPG Capital. Back in 2009, we noted that a combination of the two companies probably didn’t make a whole lot of sense. But does it make sense now?
In February 2008, Microsoft made an unsolicited, $44.6-billion cash and stock bid that was turned down and eventually pulled by Microsoft. In a recent interview with John Battelle at the Web 2.0 Summit, Microsoft CEO Steve Ballmer expressed relief that deal never went through, saying, “Sometimes, you’re lucky.”
Of course, Microsoft didn’t give up its pursuit of Yahoo. A few months after it was spurned for an all-out acquisition, it made a $1-billion offer for Yahoo’s search business, which would have included an additional $8-billion investment for 16 percent of Yahoo stock. Yahoo again turned that offer down, striking a search and advertising deal with Google (s goog) instead. A year later, in the summer of 2009, Microsoft and Yahoo were finally able to come to terms with a search pact that made sense for both companies.
Now it seems Microsoft might take another stab at acquiring Yahoo outright, at a fraction of the price it proposed just a few years ago. When Microsoft first began its pursuit of Yahoo, it reportedly offered up to $41 a share last year in 2007. Yahoo then turned down the $44.6-billion bid, which valued Yahoo stock at $31 a share — and Yahoo’s stock price has been cut in half since then, trading today at about $15 a share.
Of course, just because Yahoo is a lot cheaper doesn’t mean it’s a better value, especially since Microsoft has already struck a deal for the most important part of the business — search. What Microsoft always wanted out of Yahoo was to increase the scale of its Bing search engine and to create a more viable alternative to Google’s massive search business. Now that it’s in the midst of a 10-year exclusive agreement, there’s little incentive for Microsoft to purchase Yahoo outright.
As for the rest of what Yahoo has to offer, there’s considerable overlap between Microsoft and Yahoo’s media entities and social utilities. That includes news and entertainment sites like MSN and Yahoo’s homepage, email properties like Microsoft’s Windows Live Hotmail and Yahoo Mail, and communications apps like MSN Messenger and Yahoo Messenger. Microsoft’s recent acquisition of Skype provides even more overlap in this latter case, as the VOIP and video chat app also shares some functionality with Yahoo messenger, particularly for mobile video chat.
Most importantly, however, there’s little evidence a Microsoft-run Yahoo will fare any better than one with a new CEO or one taken over by private equity. Microsoft has already spent multiple billions on its online division, and continues to lose money quarter after quarter. Adding Yahoo’s distressed online properties is not likely to reverse that trend. The best Microsoft could hope to achieve is realizing a certain number of “efficiencies” by essentially combining and streamlining its duplicate products — which is just corporate speak for cutting a bunch of jobs.
Photo of Yahoo! billboard courtesy of Flickr user Chris Makarsky