'Microhoo' is an also-ran to Google

Microsoft is talking with Yahoo again. But so what? A merger will happen eventually and the longer this soap opera goes on, the stronger Google will get.

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By Paul R. La Monica, CNNMoney.com editor at large

Google's stock has vastly ourperformed Microsoft and Yahoo since the company reported better-than-expected first quarter results in April.

NEW YORK (CNNMoney.com) -- Way to go, Steve Ballmer. You sure showed Yahoo who's boss!

Actually, the Microsoft-Yahoo takeover saga isn't over by a long shot.

Even though Microsoft "walked away" from a bid for Yahoo earlier this month, Microsoft's CEO has come crawling back with a proposed "alternative" transaction that would not involve an outright acquisition of Yahoo.

Yawn. Does anyone honestly think that Microsoft (MSFT, Fortune 500) would be content with a mere joint venture with Yahoo (YHOO, Fortune 500)? The only reason Microsoft is going back to the table is because it needs to keep Yahoo from striking a partnership with Google.

If that happens, then Microsoft will fall further behind in Web-search advertising(I've already dubbed Microsoft the Dr Pepper of search because of its perennial third place showing in the online advertising race).

Ballmer's extension of an olive branch to Yahoo is not just a desperate move by a company that realizes it must acquire something to compete with Google (GOOG, Fortune 500).

It also appears to be a shrewd move in light of the other big recent development in the Yahoo story: that activist shareholder Carl Icahn is threatening to unseat Yahoo's board and force a sale to the company.

An alliance with Yahoo could keep Icahn at bay and also be a precursor to an eventual merger. It's the corporate equivalent of living in sin - moving in with your spouse to make sure you're really compatible before officially deciding to tie the knot. If you're Jerry Yang, you'd have to think that making nice with Microsoft is a better option than getting involved in an ugly proxy battle with Icahn.

"It is just a matter of timing but some kind of MSFT/YHOO combination is imminent," wrote Sandeep Aggarwal, an analyst with Collins Stewart, in a report Monday morning.

The upshot of all of this is that the longer this saga goes on, the more that Google can laugh all the way to the bank. The "Microhoo" talks have been a huge distraction for both companies. And it's shown in their results.

Microsoft's online services division, which includes MSN and the recently acquired aQuantive, reported an operating loss of $228 million in its most recent quarter - wider than a year ago - even though sales rose nearly 40%.

Yahoo's profits, excluding a one-time gain from an investment, fell nearly 3% from a year earlier and sales rose just 9%.

Meanwhile, Google defied the skeptics who were expecting a rough first quarter and reported sales growth of 42% and earnings growth of 32% - both topping analysts' forecasts.

Google is online advertising's Big Brown. Yahoo and Microsoft aren't going to catch Google anytime soon...if at all.

In fact, Google's stock is up nearly 25% since I wrote a column in early April suggesting that the pessimism about Google was way overblown. And Google is still probably the best way to capitalize on the robust online advertising market.

This couldn't play out any better for Google. All it has to do is keep innovating and focusing on its business. It doesn't have to fend off angry shareholders or a jilted suitor that just won't take no for an answer.

And even if Microsoft and Yahoo finally do the inevitable and get hitched, the courtship is going to take a lot out of both companies.

"We believe Carl Icahn's proxy fight may ultimately drive a damaged Yahoo! into Microsoft's arms," wrote Stifel Nicolaus analyst George Askew in a report Monday morning, adding that he is encouraging clients to "consider swapping out of Yahoo! shares and into the shares of Google."

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