Merrill Lynch: MSN, Yahoo Should Team To Fight Google

Google's continued gains in search market traffic, combined with the company's recent focus on software, increase the likelihood that Microsoft will buy Yahoo or eBay, according to analysts at Merrill Lynch.

The analysts also predict that such a deal would catapult Microsoft's revenue. "An acquisition could instantly vault Microsoft to the leading revenue position on the Internet," states the report, authored by research analysts Justin Post, Kash Rangan, and Han Pham.

Among the main benefits of a Microsoft-Yahoo deal is that the combination would immediately pose a challenge to Google's increasing strength in search, stated the report. Last month, Google garnered approximately 41 percent of all U.S. searches, compared to Yahoo's 28 percent and MSN's 13 percent, according to data from comScore Networks. With a merger, the search traffic would be roughly equal, allowing MSN to "leverage query share to build economies of scale in its advertising network, which should lead to higher query prices through more competitive advertiser bidding," asserts the report.

Also fueling a potential deal is that Google poses a growing threat to Microsoft's software business by building out a software platform. The latest move came last week, when Google forged a distribution deal with Adobe to bundle Google's toolbar with Adobe's Macromedia Shockwave Player software--installed on an estimated 55 percent of Internet-enabled desktop computers. That deal followed Google's launch of a Web-based spreadsheet earlier this month.

Merrill Lynch analysts also evaluated an MSN-eBay deal in the report, and concluded that such a deal could "lead to significant traffic and monetization improvements for both the MSN and eBay platforms."

But Merrill Lynch doesn't think a merger is imminent. Rather, the analysts predict that Microsoft will likely delay a major acquisition until the company can evaluate the results of its recent launch of the adCenter paid search platform.

The Merrill Lynch report follows weeks of speculation of merger activity involving Internet giants Google, Microsoft's MSN, Yahoo, and eBay. The latter two have already entered into an alliance; at the end of May, Yahoo and eBay announced a deal involving placing Yahoo ads on eBay and eBay's PayPal on Yahoo.