What if Yahoo and Microsoft Merged?

When Yahoo went public in April of 1996, no one suggested that Microsoft take the internet start-up under its wing. Wall Street would have laughed at such an idea.

Eleven years later, such a move is not only a possibility, it might be vital for both companies.

According to the New York Times’ Dealbook, rumors of a potential merger between Microsoft and Yahoo have resurfaced because of a recent report by Robert Peck, an analyst at Bear Stearns, who contended that the internet company would be an attractive acquisition candidate for either a technology vendor or a traditional media company.

Let’s hope that 1) it’s a technology company rather than a traditional media company (which would surely ruin Yahoo) and 2) that the company would be one that knows something about software (like Microsoft). Such a merger would ensure better competition among the internet and software companies of the future in a climate that, as it stands now, Google seems poised to dominate pretty one-sidedly.

That must sound strange: Microsoft should merge with another company to become more competitive. Don’t they still dominate the software landscape?

The short answer is yes, but there are some more complex factors at play here:

Google already dominates search and ads. And though it has exerted only minimal pressure on Microsoft’s domination of the office productivity software space, some recent announcements indicate that Google has plans to be a force there as well. For one,its addition of Sun Star Office to Google Pack was a clear shot across Microsoft’s bow, offering its customers a place to author documents other than in Microsoft Office (and for free, by the way). And two, it acquired Postini in order to offer CIO-worthy security for e-mail.

Those moves, coupled with the fact that Google doesn’t have the legacy baggage of starting their business before the web became a force in business, makes them a strong and nimble competitor in the software space.

As it stands now, Microsoft doesn’t have that same luxury, but it’s working to counter it, and a deal with Yahoo would be a good shot in the arm in that endeavor.

For Microsoft, the advantage of a merger with Yahoo is they could climb the ladder a bit in search (Yahoo is still number two) and work with a company who has never done business without the web being central to its business model. Though Microsoft’s new strategy of offering software plus services might be a good temporary solution to wean tons of their customers and partners off the old install and packaged software model, Yahoo’s strong consumer presence on the web would offer Microsoft a good springboard to develop more web-only applications that operate on a free or very cheap model.

So do you Yahoo — or, I mean, like the idea of this deal?