Microsoft and Yahoo Bidding For eBay: Plausible

Scot Wingo at eBay Strategies reports (via Valleywag) that Microsoft (MSFT) and Yahoo (EBAY) are in a bidding war for eBay and that Yahoo is expected to win with a $40-$41 bid.

Either combination makes sense strategically, although a Microsoft takeover would be disastrous (see below). The trouble with a Yahoo "takeover," meanwhile--especially at a dilutive premium--is that eBay shareholders would end up with most of the combined company, and it's not clear that Yahoo's depleted management team could do a better job of running eBay than eBay's. As Valleywag's Owen Thomas suggests, Yahoo shareholders would be foolish to sign onto a highly dilutive deal unless they see absolutely no future for the stand-alone company.

eBay-Yahoo

Very complementary businesses.

• Yahoo's Stores business would fit nicely into eBay's marketplaces
• Yahoo's search advertising inventory would help drive eBay's marketplace and increase the value of Yahoo's search product.
  
• Skype would fill a hole in Yahoo's Messaging platform (and it would be a much better fit with Yahoo than eBay)
  
• PayPal would get even better global distribution.

The trouble with this idea, though, is that even with a tired Meg Whitman at the helm, eBay's management is arguably stronger--or at least on a par with--Yahoo's depleted management. So it's hard to see eBay's shareholders jumping for joy about a deal that would not result in an immediate bonanza (eBay's stock was trading at $40 three months ago). It's also hard to see Yahoo's shareholders--us included--getting all hot and bothered about suddenly owning only a third of Yahoo-Bay.

Bottom line: The combination makes sense, but eBay should probably be the buyer, and it should be a straight 1-for-1 merger. At today's market caps, Yahoo shareholders would end up with about 44% of the company and eBay's with 56%.

Microsoft-eBay

Microsoft-for-eBay and Microsoft-for-Yahoo rumors bang around every couple of months, and our view of the end result of either has never changed: disaster.

Microsoft is already a massive global corporation, one so huge that it competes with IBM, Oracle, and SAP on one side, Apple and Sony on another, and Google and Yahoo on a third. No company can do everything, and the main reason Microsoft has been sucking wind since 1995 in its Internet business is that the Internet business is -- and will forever be -- a sideshow.

More than 100% of Microsoft's profits come from two divisions: Windows and Office (the other divisions subtract profit). The company's Internet business has always played second fiddle to the company's prime directive, which is to protect the awesome cash generation and competitive position of both of those businesses.

Microsoft could buy eBay or Yahoo, and the Internet division would still be a troubled little sibling. Among the problems:

• Windows and Office chieftains will still rule the company: eBay and Yahoo would always play second fiddle.
  
• eBay / Yahoo would have no chance -- zero -- of attracting top entrepreneurial and stock-option-motivated talent.
• The remaining talent at either company would flee, much of it to Google.
• Microsoft's jumble of new Internet assets, as well as its confused Windows Live strategy, would prohibit effective integration: All of Microsoft's Internet fiefdoms would be just that--fiefdoms--and Microsoft would probably end up spinning them out (just as it did with Expedia).

We could go on. Microsoft could definitely outbid Yahoo for eBay, but the end result for both Microsoft and eBay shareholders would be ghastly.

Disclosure: Henry Blodget owns Yahoo, Microsoft, and eBay.