Google has finally recognized that this deal was never going to come true.  And the opportunity-line for Yahoo has been severed.  A Microsoft offer is not going to be at a premium, it’s going to be a lifeline.  Ultimately, two companies that have a proven history of being horrible at integrating acquisitions should not merge.  Yahoo and AOL coming together would represent the largest distraction in the industry, giving Google more time and opportunity to grow even faster and more furiously than before.  Over the next 6 months, Yahoo and AOL will lose more market share to Google while they figure things out.  What alternatives exist?  Would IAC and ASK.com consider selling its ASL network to Microsoft?  What if Microsoft and Yahoo don’t do a deal ever?  What if Microsoft simply approaches Yahoo with the same deal that Google approached them with.  Just run Microsoft ads on Yahoo.  Now there’s an alliance only purgatory could create!

Google has finally recognized that this deal was never going to come true.  And the opportunity-line for Yahoo has been severed.  Now what?  Enter Balmer.  3-2-1, how many days will pass before we read of an offer for $15, maybe $20 a share at most.  Trading at $13 a share today, the day after Obama was elected President of the United States.  You would think that the election results would have driven the market up, but job-loss numbers are pushing a 400pt drop instead.  A Microsoft offer is not going to be at a premium, it’s going to be a lifeline.  If Yahoo tries to hold out and go for the AOL deal, they will delay Balmer and probably allow their stock to drop further over the next 6 months and yield an even lower offer as a result if AOL fails to come through.

Ultimately, two companies that have a proven history of being horrible at integrating acquisitions should not merge.  Yahoo and AOL coming together would represent the largest distraction in the industry, giving Google more time and opportunity to grow even faster and more furiously than before.  Over the next 6 months, Yahoo and AOL will lose more market share to Google while they figure things out.  Yahoo will get so buried in the post-deal work that Google will have the opportunity to rapidly steal customers and demonstrate to publishers that their superior ad base warrants additional exclusive access to their inventory.

Microsoft will have to strive for acquisition wherever they can find it if they are going to compete, really compete, in the game.  They can go after the combined Yahoo and AOL – which will be at a premium over the original Yahoo offer – or they can look to roll-up the remaining 10% of the industry covered by the tier-2 networks.  If Yahoo and AOL merge, and Microsoft subsequently buys just the search business that would leave Yahoo and AOL out of that game and fledgling.  Microsoft would have picked up 20+pts of the market and would have to figure out how to integrate together and manage two degrading networks that are losing to Google at the same time.

What alternatives exist?  Would IAC and ASK.com consider selling its ASL network?  Doubtful.  But it does have several thousand advertisers and several thousand distribution partners.  What about LookSmart, MIVA, Industry Brains and Seevast?  That’s a lot of work for Microsoft to do, but it’s a consolidation that needs to happen at some point.  Google gobbles market share, and they are taking it from Microsoft.  Not from the tier-2 networks.  Not yet.  I’ve written about this before.  Microsoft either buys Yahoo now, or buys just the Search business from Yahoo-AOL.  Or they turn their heads and gobble up a few of the tier-2s while Yahoo-AOL get organized and degrade in value and beg for Balmer to buy them later.

Here is another totally interesting question.  What if Microsoft and Yahoo don’t do a deal ever?  What if Microsoft simply approaches Yahoo with the same deal that Google approached them with.  That deal is indicative of the fact that Yahoo wants out of search.  DOJ would probably approve the two smaller players coming together against Google.  If Microsoft wants to stay in the game, let them just do the deal with Yahoo to acquire the inventory and run their ads on it.  Screw the M&A.  Run Microsoft ads on Yahoo.  There’s an alliance only purgatory could create!