The lustful eyes of Wall Street bulged expectantly and US analysts spun into a frenzy on Friday when the New York Post reported that Microsoft was set to put $50-billion on the table for Yahoo. Alas and alack, it turned out the rumours were just that … for the time being.

The speculation did help to boost Yahoo's stock price by 18% in midday trading and an overall 10% at the close – up to $30.98 -once the Wall Street Journal disclosed that "exploratory talks" had come to an end.
But, as they say, where there's smoke, there's fire. And there is little doubt that the dying embers of Friday's flare-up are going to be attentively fanned and stoked by the majority of US analysts who almost overwhelmingly see the merging of Microsoft and Yahoo as a case of when and not if.
The Sydney Morning Herald reports that Ben Schachter, an analyst with UBS,  says that Yahoo is the only meaningful acquisition Microsoft can make to significantly strengthen its Internet business.
Last year, he points out, Microsoft sold $2.3-billion in Internet advertising, compared to $4.6-billion for Yahoo and $7.3-billion for Google.
While Microsoft would prefer to create its own successes, it is not clear they can do that on the Internet. "They are not getting any traction," Schachter says.
Microsoft and Yahoo have explored working together since Microsoft moved its advertising sales on to its own platform – and off Yahoo's – in the spring of 2006, says SMF. One idea, strongly rebuffed by Yahoo, was that Microsoft take an equity stake in Yahoo while simultaneously spinning off its internet division and folding it into Yahoo.
"My impartial advice to Microsoft is that you have no chance," Yahoo CEO Terry Semel said last May after the proposal was leaked. Semel added that it would not be smart to sell "your right arm while keeping your left."
In an interview with the San Jose Mercury News last week, Semel said he is confident in Yahoo's strategy to sell advertising both on its own network of websites and throughout the Internet.
The strategy has included a wide-ranging advertising partnership with more than 260 newspapers, as well as with eBay and Viacom. Yahoo also purchased Right Media, an online advertising exchange that allows Yahoo to broker advertising sales between any advertiser and website, regardless of whether they are affiliated with Yahoo. Most importantly, Yahoo redesigned its advertising software to be more competitive with Google. Codenamed "Panama," the system was launched in the US at the end of March.
Some analysts have calculated that the effect of these changes will increase Yahoo's market value 35% this year.
On Friday, US analysts were convinced that talks between Microsoft and Yahoo would bear fruit.
"The talks are real," Computerworld reported Greg Sterling, founding principal of Sterling Market Intelligence, as saying. In the wake of the Google-DoubleClick deal, both Microsoft and Yahoo need to do something "radical," he adds.
"An alliance wouldn't satisfy the market," Sterling says. "The market wants a 'game-changing' move. On paper, an acquisition looks good."
The report continues: Google is the enemy, and the sooner Microsoft and Yahoo respond to the Internet giant's growing online presence, the better, according to Rob Enderle, president of the Enderle Group.
"Both companies are struggling to compete with Google, which has become incredibly powerful in the Internet advertising space," he says. "This is a competitive response to the amount of power that Google is collecting."
Enderle notes that while "big deals like this could be tough," he points out that "Yahoo's numbers aren't good, and this could put pressure on the company's executives to consider a deal."
A move to hook up with Microsoft could also help Yahoo catch up to Google on the "perception" front, according to Jennifer Simpson, an analyst at Yankee Group Research. "Yahoo, although seen as a viable competitor to Google, is not at the top of many people's minds anymore in terms of being a competitor."
Most analysts see more advantages than disadvantages of a tie-up between Microsoft and Yahoo.
"What Yahoo has and Microsoft really doesn't is a foothold in the Silicon Valley community, which is becoming increasingly important for acquisitions, development and getting the word out," Simpson says. "This partnership would bring that to Microsoft."
Microsoft also stands to benefit from Yahoo's online expertise. "Microsoft is essentially a technology company that has been focused on its Windows and Office software products," says Emily Riley, an analyst at JupiterResearch LLC. "Yahoo is very different; it's an Internet company through and through."
But, adds Computerworld, analysts are also quick to point out that a deal between the two companies could pose some huge challenges.
"Integrating the workforces, the different corporate cultures and technologies will not be easy," says Sterling.
And then there's the "size" issue, according to Simpson.
"There is a certain hesitancy already about Microsoft's hold in the market, particularly in the software market," says Simpson. That could be a concern "if it goes out and buys a large Internet property like Yahoo."