Can Microsoft/Yahoo! deal take on Google?

The potential Microsoft takeover of Yahoo! would help both companies fight Google in the online advertising and services market but it also faces some major challenges and obstacles.

That's the view of analysts following Microsoft's $44.6bn bid for web giant Yahoo!.

David Mitchell, senior VP at Ovum told silicon.com: "For me there are two reasons why Microsoft is looking to do this. The first one is a defensive move within some of their existing businesses. I'm particularly thinking here of Microsoft Office. Over time those [Google] applications are always going to get richer and richer and potentially become a competitor with MS Office."

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The second reason, he said, is a straight "toe-to-toe online advertising fight" with Google.

Mitchell said: "It certainly gives them a much better platform to attack Google. Putting Yahoo! and Microsoft together gives the combined entity more ability to compete against a very, very formidable foe in Google. And long term Google has always been a company that Microsoft has had some fear of in terms of its damage to their potential day-to-day business."

But Mitchell disagreed with critics who have labelled this as a desperate bid by Microsoft. "I don't think it's [an] 'at any cost' deal," he said.

A Microsoft/Yahoo! tie-up also raises market competition issues but Mitchell said: "I don't think it makes it into a duopolistic market. It won't stifle innovation in the market at all. There will still be lots of new young start-ups coming in to do speciality bits of search."

Yahoo! rebuffed an initial approach by Microsoft last February - as revealed in Steve Ballmer's bid letter - but analyst TBR predicted Yahoo!'s "ongoing struggles and uncertain future" will persuade CEO Jerry Yang to accept Microsoft's offer this time.

TBR said both companies face a "hard uphill battle" in the online search market and a unified front is the best way forward to challenge Google.

Yahoo! may also benefit from a takeover as Microsoft would provide additional sources of revenue - other than internet advertising - making Yahoo! less vulnerable to a market downturn, TBR said.

Gartner analyst Andrew Franks said a merger would be challenging as it raises the question of how the two companies could effectively continue to operate during integration.

In a research note he said the online advertising business requires "significant levels of account service" meaning any impression that the companies are diverted could see business going to competitors.

Franks also warned that antitrust laws will be a factor in a deal of this scale with the European Union in particular being a potential obstacle.