Since Microsoft has pulled out of the Yahoo deal, we've picked out potential targets that would strengthen the software giant's presence in the search, web advertising and Web 2.0 services.

Microsoft's decision to walk away from the Yahoo takeover has left the software giant with billions burning a hole in its pocket. The obvious next step would be to take over other internet firms crying out for investment, but out of the hundreds of Web 2.0 concerns, which should Microsoft choose?

Based on search, web advertising and Web 2.0 services, things that in our eyes are Microsoft's biggest weaknesses, we've rounded up potential targets that would provide at least some of the same kudos buying Yahoo would have created.

NEXT PAGE: AOL should be Microsoft's top choice

  1. The companies that Microsoft should bid for
  2. AOL should be Microsoft's top choice
  3. Why LinkedIn could be Microsoft's perfect purchase
  4. Why ValueClick could be the one for Microsoft

Visit PC Advisor's Microsoft spotlight for the latest Microsoft news and opinion

Since Microsoft has pulled out of the Yahoo deal, we've picked out potential targets that would strengthen the software giant's presence in the search, web advertising and Web 2.0 services.

AOL

Forget about its declining dialup business, which Time Warner is splitting off from AOL in any case. AOL is the most logical Microsoft acquisition for a number of reasons.

AOL's online advertising network, called Platform A, is the largest in the US, even bigger than Yahoo's. According to comScore, Platform A had 91 percent reach of the total US internet audience in March in comparison with Yahoo's 85 percent reach and third-place Google's 81 percent reach.

Microsoft, through its DRIVEpm division (previously part of aQuantative), ranks eighth, with 66 percent reach. Time Warner itself says Platform A, formerly called Advertising.com, delivers 3bn web banner ads a day to AOL and other websites. AOL acquired Advertising.com in mid-2004 for $435m (£217.5m), a price that now looks pretty good.

It may seem like only your parents and grandparents actually use AOL, but its web properties are actually the fourth most popular in the US measured by unique visitors, behind only Yahoo, Google and Microsoft, according to comScore. They are ahead of such leading lights as MySpace, eBay eBay, Amazon and Facebook. Despite the overlap, a merger of Microsoft and AOL's properties would likely lead to an immediate leap to the top.

One of those web properties is AOL's recently acquired Bebo, which is huge here in the UK and many other countries. It's one of a number of sites; Hi5, Friendster, Google's Orkut and others, that are vying for third place behind MySpace and Facebook in the casual-social-networking space.

AOL Instant Messenger's (AIM) days of dominance may be long over, but according to comScore, it remains the third most popular IM network worldwide, behind Windows Live Messenger and Yahoo Messenger, and the most popular in the crucial US market. AIM also had no interoperability with either Microsoft or Yahoo's services (it chose to partner with Google instead) making a combination with Windows Live Messenger even more appealing.

Down sides

AOL's display advertising business is stagnant, with the company acknowledging during its financial conference call last week that it was wrestling with integration issues from two recent advertising-related acquisitions. And what about that web advertising bubble that people are talking about?

Potential price

AOL's revenue makes up about a tenth of Time Warner's overall revenue. With AOL's access business declining and even its web advertising revenue slipping slightly, it's hard to argue that AOL is exhibiting any more growth potential than Yahoo. A £5bn offer would value AOL at a 79 percent premium over one-tenth of Time Warner's £28bn market cap. That's higher than the 72 percent premium Microsoft's final $33-per-share offer would have paid over Yahoo's then-dipping stock price. In other words, more than fair.

NEXT PAGE: Why LinkedIn could be Microsoft's perfect purchase

  1. The companies that Microsoft should bid for
  2. AOL should be Microsoft's top choice
  3. Why LinkedIn could be Microsoft's perfect purchase
  4. Why ValueClick could be the one for Microsoft

Visit PC Advisor's Microsoft spotlight for the latest Microsoft news and opinion

Since Microsoft has pulled out of the Yahoo deal, we've picked out potential targets that would strengthen the software giant's presence in the search, web advertising and Web 2.0 services.

LinkedIn

Microsoft wants to get into social networking in a big way. Why not buy LinkedInn? The 20 million-member professional networking site, in danger of becoming a Web 2.0 punch bag the way Evite has, has made a number of technical improvements in the past year to stay relevant.

The firm recently claimed that it was selling at least some of its web ads at a $75 cost per thousand impressions (CPM) rate. If that's true, it's getting a far higher rate than most competitors. LinkedIn is targetting revenue this year of $75m to $100m.

For Microsoft to take over MySpace or even Facebook would tarnish much of the cool factor that makes those sites popular with young adults. There'd be much less backlash if it bought LinkedIn. Buying LinkedIn also wouldn't conflict with Microsoft's existing efforts, most significantly Windows Live Spaces, which are not puny. According to Nielsen Online statistics Windows Live Spaces actually had 8.3 percent of the social-networking market last August, just behind Facebook's 8.5 percent.

Down sides

LinkedIn CEO Dan Nye has said the company is uninterested in a buyout, and is aiming for an initial public offering next year, instead. After all, going public is more glorious than settling for a buyout, but you never know. Also, LinkedIn doesn't have a public history of setting and delivering on its revenue goals.

Potential price

Fending off News Corp takeover rumours, Nye said late last year that LinkedIn was worth "a lot more" than $1bn. If Microsoft was willing to put $240m into Facebook for a mere 1.6 percent share of the company, giving it a $15bn theoretical valuation, then $1bn-plus for all of LinkedIn, which, according to stats released last fall, was growing faster than Facebook, seems reasonable.

NEXT PAGE: Why ValueClick may be the one for Microsoft

  1. The companies that Microsoft should bid for
  2. AOL should be Microsoft's top choice
  3. Why LinkedIn could be Microsoft's perfect purchase
  4. Why ValueClick could be the one for Microsoft

Visit PC Advisor's Microsoft spotlight for the latest Microsoft news and opinion

Since Microsoft has pulled out of the Yahoo deal, we've picked out potential targets that would strengthen the software giant's presence in the search, web advertising and Web 2.0 services.

ValueClick

Bolstering web advertising is Microsoft's single greatest need (besides search, which, given Google's dominance of core search and the infancy of vertical search engines, is impossible for Microsoft to boost quickly through acquisition). ValueClick would appear to fit the bill nicely.

The firm is the fifth-largest provider of web banner advertising in the US, according to comScore. Its revenue last year was $645.6m, up more than 14 times from 2001's $44.9m, according to Morningstar.com.

Moreover, ValueClick, despite a zigzagging stock price due to on-again, off-again rumours of a Microsoft acquisition, remains a good value. The profitable firm's market cap was just under $2bn, giving it a forward price/earnings ratio of just 20.6. Microsoft's final offer of $33 per share pegged Yahoo at a forward P/E ratio of about 60.

Down sides

ValueClick's reputation is hurting, and its momentum is flagging. In March, the company agreed to pay a record $2.9m to settle a Federal Trade Commission complaint that it sent deceptive advertising claims in spam email and failed to protect consumers' sensitive financial information. The same month, it lost a key customer in eBay, which is migrating management of its affiliate programs away from ValueClick. And don't forget the buzz, or lack thereof. Online advertising is important, but compared with the other candidates, it's not exactly the most attention-getting option.

Potential price

Microsoft could double ValueClick's stock price, pay $4bn and still get, mathematically speaking, a better deal than it was willing to make for Yahoo or the $6bn deal it made for aQuantive last year. If ValueClick is uninterested, Microsoft could also go for Specific Media, which actually ranked slightly higher than ValueClick, according to comScore. Specific Media received $100m in funding from venture capital firms last year. With all of the recession talk, it may welcome a quick exit.

  1. The companies that Microsoft should bid for
  2. AOL should be Microsoft's top choice
  3. Why LinkedIn could be Microsoft's perfect purchase
  4. Why ValueClick could be the one for Microsoft

Visit PC Advisor's Microsoft spotlight for the latest Microsoft news and opinion