NEW YORK Speculation about a possible Microsoft-Yahoo tie-up met with skepticism Friday from analysts as reports that the deal was already dead began to surface.
The reported takeover talks that sent shares of Yahoo Inc. up by 10 percent Friday were no longer taking place, the Wall Street Journal said in an online article citing sources familiar with the negotiations.
Yahoo Inc. shares surged following published reports Friday that Microsoft Corp. had resumed its pursuit of Yahoo to better compete with Web search and advertising leader Google Inc.
Both companies declined comment on the reports.
David Hallerman, a senior analyst at the research group eMarketer, said he saw many cultural problems and few strategic benefits with a Microsoft-Yahoo combination.
"There's too much overlap between Microsoft and Yahoo, and to try to merge the company cultures of two large companies like that in general is hard," Hallerman said.
Hallerman said Microsoft would be better off buying an ad network to beef up its own operations, the same way Time Warner Inc.'s AOL has seen its advertising revenue grow following the acquisition of Advertising.com's technology and sales force.
Yahoo, meanwhile, would have lost the flexibility it needs to compete if it became one division within a larger company like Microsoft, he said.
Industry analyst Matt Rosoff with Directions on Microsoft in Kirkland, Wash., said the huge takeover was unlikely, noting that Yahoo would duplicate services Microsoft's MSN already provides, such as instant messaging and e-mail.
It is possible, Rosoff added, that Microsoft and Yahoo might pursue a deal involving only online search advertising. Hallerman said he could see at most a spinoff of Microsoft's MSN online division to be run by Yahoo.
Microsoft clearly needs to make some kind of bold move because it remains a distant third in the lucrative online search market despite investing heavily in an attempt to gain ground on Google and Yahoo, said Ryan Jacob, who runs an Internet fund specializing in Internet stocks.
To make matters worse for Microsoft, the personal computer software empire that accounts for most of its profits is being increasingly threatened by so-called "open source" alternatives as well as free online programs being offered by Google and others.
"Microsoft is at a crossroads," Jacob said.
Yahoo also has reached a critical juncture after sputtering through much of 2006 while Google's search engine continued to fire on all cylinders. The troubles weighed on its stock, price which plunged 35 percent last year to wipe out about $20 billion in shareholder wealth.
An improved advertising format, dubbed "Panama," raised hopes for a quick turnaround earlier this year, but those evaporated last month when Yahoo reported an 11 percent decline in its first-quarter profit. Analysts say Yahoo's earnings better pick up in the second half of this year or Chairman Terry Semel might lose his job as chief executive.
A combined Microsoft-Yahoo still wouldn't be as large as Google. In March, Google commanded a 48 percent share of the U.S. search market, trailed by Yahoo at 27.5 percent and Microsoft at 11 percent, according to the latest data from comScore Media Metrix.
Microsoft is feeling increasing pressure to compete with Google, which plans to beef up its portfolio with a $3.1 billion purchase of online advertising company DoubleClick Inc. Both Microsoft and Yahoo also expressed interest in buying DoubleClick before being trumped by Google.
Microsoft currently trails both Yahoo and Google in the lucrative and growing business of Web search, even as Google increases its development of Web-based software that directly competes with Microsoft's lucrative Office suite.
Microsoft and Yahoo each considered buying a stake in AOL in late 2005, but Google ultimately won a search advertising deal and agreed to pay $1 billion for a 5 percent stake in AOL.
Earlier this week, Yahoo said it would buy 80 percent of advertising exchange Right Media for $680 million, increasing its stake in that company to full control.
Yahoo shares surged $2.80, or 9.9 percent, to $30.98 on Friday, while shares of Microsoft fell 41 cents to $30.56.