NEW YORK (CNN/Money) -
Is Microsoft getting all "Google"-y eyed about a big acquisition?
The world's largest software company is said to have approached search engine Google about a partnership or outright merger, according to a report in the New York Times. And although analysts said a deal for Google makes strategic sense, they also thought a merger was unlikely.
For one, Google, which is considering an initial public offering for sometime next year, would not be a cheap acquisition. There are estimates that Google could be worth between $15 billion and $25 billion if it goes public.
"Microsoft would think twice about spending more than $20 billion," said Brendan Barnicle, an analyst with Pacific Crest Securities. "The probability of a deal happening is low."
It has the cash but probably won't use it
An acquisition of this magnitude would also be a huge departure for Microsoft (MSFT: Research, Estimates), which has typically chosen to build its own products rather than buy them. But when it does pull a Monty Hall and makes a deal, Microsoft has usually chosen not to spend a whole lot.
Microsoft's biggest acquisition in its history is the $1.5 billion stock deal for graphics software company Visio in 2000. Microsoft also spent about $1.3 billion for Danish business software firm Navision last year and $1.1 billion for Great Plains Software in 2001.
Yes, Microsoft has $51.6 billion in cash. But that doesn't make it any more likely to spend a huge amount on Google. After all, security is another big area that Microsoft is said to be bulking up in, especially in the wake of several high-profile worms and bugs that have targeted Windows this summer.
Microsoft could clearly afford to buy a company like Symantec (SYMC: Research, Estimates) or Network Associates (NET: Research, Estimates), which have market values of $10.2 billion and $2.2 billion, respectively. But instead, Microsoft purchased of the assets of a small privately held Romanian anti-virus software firm called GeCad in June, saying it intends to use GeCad as a springboard toward launching its own anti-virus products.
Searching for a bigger role in search
Sure, search does seem to be a lucrative area that Microsoft would like to have a stronger foothold in, given that advertisers have shown a willingness to spend on so-called sponsored searches, which tie ads to specific keyword searches.
Microsoft's MSN division, which posted its first operating profit in Microsoft's most recent quarter, partners with Overture Services for paid listings. There had been rumors that Microsoft would dump Overture now that it is owned by MSN competitor Yahoo! (YHOO: Research, Estimates), but MSN recently agreed to extend its contract with Overture until 2005.
Microsoft also gets traditional search results from Inktomi, which is owned by Yahoo! as well. And it's highly unlikely that Microsoft would want to continue to fork over dollars to rival Yahoo! indefinitely. So Microsoft would either need to develop its own search engine technology or buy into the market as Yahoo! did.
"Search has been an area that Microsoft has highlighted," said Barnicle. "Google would be an interesting strategic fit but Microsoft has talked about building something internally."
But if Microsoft does not make significant progress with its own search capabilities, it may in fact want to partner with Google. So far, Microsoft has a beta version of a Web crawler search tool called MSNBot that could be built into the next version of Windows.
With that in mind, Drake Johnstone, an analyst with Davenport & Co., said it is more likely that Microsoft will make a strategic investment in Google as opposed to buying the company. And there is precedent for that.
Microsoft, after all, invested a cool $1 billion in cable operator Comcast back in 1997. Mister Softee has also shown a willingness to support competitors as well, with investments in software rivals Borland and Corel, not to mention Apple, during the past few years.
Officials from Microsoft and Google both declined comment about the speculation.
Barnicle owns shares of Microsoft but Johnstone does not. Neither analysts' firm has an investment banking relationship with Microsoft.