The big news today is that Microsoft is moving to acquire Yahoo!. Yahoo!'s stock price is up. Microsoft's price is down. So why would Microsoft want to spend $50,000,000,000 to buy Yahoo!?

Companies engage in mergers and acquisitions for strategic reasons: they want to grow sales and earnings, gain new technology, eliminate a competitor, strengthen a position and so on. In Microsoft's case, it is being driven by fear of Google, which has emerged as a major threat to Microsoft. Google originally focused on providing internet advertising and search capabilities. Its approach was novel, software sophisticated and management creative. It made a lot of money and extended its technology into many new areas, such as Google Docs and Spreadsheets, which compete directly with Microsoft's bread and butter products. Moreover, Microsoft wants to grow its business in internet advertising and it has been losing the battle for internet eyeballs. This is really why Microsoft wants to buy Yahoo! So what would a Microsoft/Yahoo! merger look like?

A VectorVest comparison of MSFT and YHOO shows that MSFT is undervalued, and YHOO is overvalued. MSFT has a better financial track record, higher earnings per share, higher forecasted earnings growth and it pays a dividend while YHOO does not. In fact, Microsoft is superior to YAHOO! by every key indicator and parameter that VectorVest provides. So how could this acquisition possibly help Microsoft's stock price go up?

That's a very good question and I can't answer it. First of all, MSFT's EPS would go down by about $0.13 per share. Earnings growth will go down unless someone lights a fire under Yahoo!, and I don't think that's going to happen. Microsoft has a crummy management team and so does Yahoo!. How can two crummy management teams mate to produce a creative, dynamic, entrepreneurial team? I don't know. So if the merger does go through, I won't be calling Microsoft Microsausage anymore. I'll be calling it Microhoo!

P.S. Maybe Microsausage should buy Apple; then they could put Steve Jobs in charge.