Three companies Microsoft could buy instead of Yahoo

Assuming that Saturday’s public walkaway by Microsoft doesn’t prove just to be a high-risk negotiation tactic against Yahoo — after all, the companies are rumored to have been talking about some sort of merger or acquisition for almost three years — then what we have is a software vendor suddenly awash in tens of billions of unspent dollars that it can now lavish on other Internet firms.

But who to choose? Keeping in mind Microsoft’s relative weaknesses — search, Web advertising, and Web 2.0 services — we’ve come up with a short list of potential targets that would provide at least some of the same bang as buying Yahoo would have given.

[ For the complete saga of Microsoft’s unsuccessful bid to take over Yahoo, check out InfoWorld’s special report. ]

Bachelor No. 1: AOL Forget about its declining dial-up business, which Time Warner is splitting off from AOL proper in any case. AOL is the most logical acquisition for Microsoft for at least four reasons:

1. AOL’s online advertising network, called Platform A, is the largest in the U.S. — even bigger than Yahoo’s. According to comScore, Platform A had 91 percent reach of the total U.S. Internet audience in March in comparison with Yahoo’s 85 percent reach and third-place Google’s 81 percent reach. Microsoft, through its DRIVEpm division (previously part of aQuantive), ranks eighth, with 66 percent reach. Time Warner itself says Platform A, formerly called Advertising.com, delivers 3 billion Web banner ads a day to AOL and other Web sites. AOL acquired Advertising.com in mid-2004 for $435 million, a price that now looks pretty good.

2. It may seem like only your parents and grandparents actually use AOL, but its Web properties are actually the fourth most popular in the U.S. measured by unique visitors, behind only Yahoo, Google, and Microsoft, according to comScore. They are ahead of such leading lights as Fox Interactive Media’s MySpace.com, eBay, Amazon.com, and Facebook. Despite the overlap, a merger of Microsoft and AOL’s properties would likely lead to an immediate leap to the top.

3. One of those Web properties is AOL’s recently acquired Bebo. Though not popular in the U.S., Bebo is reportedly huge in the U.K. and many other countries. It’s one of a number of sites — Hi5, Friendster, Google’s Orkut, and others — that are vying for third place behind MySpace.com and Facebook in the casual-social-networking space.

4. AOL Instant Messenger’s (AIM) days of dominance may be long over, but according to comScore, it remains the third most popular IM network worldwide, behind Windows Live Messenger and Yahoo Messenger, and the most popular in the U.S. AIM also had no interoperability with either Microsoft or Yahoo’s services (it chose to partner with Google instead) making a combination with Windows Live Messenger even more appealing.

Downsides: AOL’s display advertising business is stagnant, with the company acknowledging during its financial conference call last week that it was wrestling with integration issues from two recent advertising-related acquisitions. And what about that Web advertising bubble that people are talking about?

Potential price: AOL’s revenue makes up about a tenth of Time Warner’s overall revenue. With AOL’s access business declining and even its Web advertising revenue slipping slightly, it’s hard to argue that AOL is exhibiting any more growth potential than Yahoo. A $10 billion offer would value AOL at a 79 percent premium over one-tenth of Time Warner’s $56 billion market cap at Friday’s close. That’s higher than the 72 percent premium Microsoft’s final $33-per-share offer would have paid over Yahoo’s then-dipping stock price. In other words, more than fair.

Bachelor No. 2: LinkedIn Microsoft wants to get into social networking in a bad way. Why not buy LinkedIn? The 20-million-member professional networking site, in danger of becoming a Web 2.0 punching bag the way Evite has, has made a number of technical improvements in the past year to stay relevant.

The Silicon Valley firm recently claimed that it was selling at least some of its Web ads at a $75 CPM (cost per thousand impressions) rate. If that’s true, it’s getting a far rate higher than most competitors. LinkedIn is targeting revenue this year of $75 million to $100 million.

For Microsoft to take over MySpace or even Facebook would tarnish much of the cool factor that makes those sites popular with young adults. There’d be much less backlash if it bought LinkedIn. Buying LinkedIn also wouldn’t conflict with Microsoft’s existing efforts — most significantly Windows Live Spaces — which are not puny. According to Nielsen Online statistics quoted by The Economist magazine, Windows Live Spaces actually had 8.3 percent of the social networking market last August, just behind Facebook’s 8.5 percent.

Downsides: LinkedIn CEO Dan Nye has said the company is uninterested in a buyout, and is aiming for an initial public offering next year, instead. That may be typical Silicon Valley rhetoric, where going public is more glorious than settling for a buyout, but you never know. Also, LinkedIn doesn’t have a public history of setting and delivering on its revenue goals.

Potential price: Fending off News Corp. takeover rumors, Nye said late last year that LinkedIn was worth “a lot more” than $1 billion. If Microsoft was willing to put $240 million into Facebook for a mere 1.6 percent share of the company (giving it a $15 billion theoretical valuation), then $1 billion-plus for all of LinkedIn, which, according to stats released last fall, was growing faster than Facebook, seems reasonable.

Bachelor No. 3: ValueClick Bolstering Web advertising is Microsoft’s single greatest need (besides search, which, given Google’s dominance of core search and the infancy of vertical search engines, is impossible for Microsoft to boost quickly through acquisition). The Westlake Village, Calif.-based firm would appear to fit the bill nicely.

The Nasdaq-traded firm is the fifth-largest provider of Web banner advertising in the U.S., according to comScore. Its revenue last year was $645.6 million, up more than 14 times from 2001’s $44.9 million, according to Morningstar.com.

Moreover, ValueClick, despite a zigzagging stock price due to on-again, off-again rumors of a Microsoft acquisition, remains a good value. As of last Friday, the profitable firm’s market cap was just under $2 billion, giving it a forward price/earnings ratio of just 20.6. Microsoft’s final offer of $33 per share pegged Yahoo at a forward P/E ratio of about 60.

Downsides: ValueClick’s reputation is hurting, and its momentum is flagging. In March, the company agreed to pay a record $2.9 million to settle an Federal Trade Commission complaint that it sent deceptive advertising claims in spam e-mail and failed to protect consumers’ sensitive financial information. The same month, it lost a key customer in eBay, which is migrating management of its affiliate programs away from ValueClick. And don’t forget the buzz, or lack thereof — online advertising is important, but compared with the other candidates, it’s not exactly the most attention-getting option.

Potential price: Microsoft could double ValueClick’s stock price, pay $4 billion and still get — mathematically speaking — a better deal than it was willing to make for Yahoo or the $6 billion deal it made for aQuantive last year. If ValueClick is uninterested, Microsoft could also go for Specific Media, which actually ranked slightly higher than ValueClick, according to comScore. Specific Media received $100 million in funding from venture capital firms last year. With all of the recession talk, it may welcome a quick exit.