Ballmer Will Wait Until Bartz Comes Calling

So it turns out that a few investors were incorrect in that Microsoft was going to make a move for Yahoo's search business ahead of the appointment of a new CEO. So now I believe that in choosing Carol Bartz as Yahoo's new CEO, a transaction with Microsoft will be pushed back several months.

I have said in the past that a transaction is not imminent, despite the rampant speculation in the press. See old write-ups here, here, and here. But I also believe that Microsoft has no choice but to acquire Yahoo if they are serious about having a meaningful presence in online advertising. Microsoft cannot, in my view, close the 3% to 60% gap it has with Google on global search share by organic means. They need to acquire Yahoo if they are serious about online advertising. There is currently a market demand shift to performance based advertising, of which, search is the dominant form. Thus, search is likely to become a much more significant component of online advertising over the next few years.

Now back to Carol Bartz. Her successful history at Autodesk will no doubt be an asset to Yahoo in helping bring about a cogent strategic focus, cost discipline, and organizational control, which had been quite loose over the years.

But her challenges are enormous. Sure Yahoo is one of the leading Internet assets in the world, is number one in display advertising, a solid number two in search, has a strong balance sheet and has significant off-balance sheet assets. However, Yahoo has a struggling display business that is facing enormous headwinds due to the recession, the search business continues to lose share to Google, and the paid content business is largely irrelevant and a slow grower at best. Think about it. Which one of Yahoo's three core business are you willing to hang your hat on?

Other than hopes of an acquisition, there is no clear reason to own Yahoo's shares. However, I still believe that it make sense to put personal money into Yahoo and just sit and wait for an action with Microsoft.

Wall Street appeared to applaud the hiring mainly because it removes an overhang and not because they believe Bartz will do something magical to turn this business around. She appeared overly confident on the conference call with analysts but she will soon come to realize that she is in over her head. Internet businesses are vastly different than software businesses. Ask Microsoft.

This brings me to my final point on the MicroHOO issue. A transaction will occur when Bartz realizes that there is nothing that Yahoo could do to improve its competitive position. Market dynamics are too unfavorable for Yahoo. She will then pick up the phone and call Ballmer and ask to be acquired. Ballmer knows this and is willing to wait it out. End of story.

But for now the saga continues.