Could a $2 billion + investment in Yahoo be Microsoft's "something big?"

Redmond (WA) - According to a story published in the "Heard on the Street" column in this morning’s Wall Street Journal, Microsoft has considered, and is still considering, working out some type of equity partnership agreement with Yahoo, the terms of which have reportedly included either Microsoft purchasing a stake in Yahoo, or Yahoo purchasing MSN from Microsoft in exchange for Yahoo stock.

Last year, the word on the street was that Microsoft and Google were vying with one another for the right to purchase a stake in AOL. That fight ended with Google the victor, winning the right to purchase a 5% stake in the one-time Internet services giant. With the big, wide Internet comprised basically of a few huge companies anyway, analysts may be watching to see whether the remaining powerhouses do an "ExxonMobil" or a "ConocoPhilips" on the industry. But some observers are wondering whether analysts are jumping to conclusions, making a safe bet that Microsoft and Yahoo can mull over a partnership mainly because...they can.

In last week’s Microsoft quarterly earnings report, a Merrill Lynch analyst "did the math," coming up with an over $2 billion extra difference between projected revenues and profits, apparently accountable to a little extra investment. What could Microsoft possibly want to invest in so quickly that could be worth $2 billion, the analyst posed. He didn’t get a straight answer - Microsoft’s CFO suggested he wasn’t familiar with the way Merrill Lynch performed its math - but this afternoon, The Wall Street Journal points to last week’s hiring by Microsoft of Ask.com CEO Steve Berkowitz - reputed to be a "deal maker" - as an indicator of the company’s interest not to grow MSN on its own, but to acquire all or part of an existing portal. The story quotes a former Yahoo executive, turned industry analyst, as saying a merger of MSN and Yahoo could culminate in an Internet portal that’s (finally) larger than Google, with the muscle to truly take it on.

A recent Nielsen NetRatings report showed Google’s share of Internet searches rose to 48.5% in the last quarter, with #2 Yahoo lagging behind at 22.5%, and MSN dropping 0.3% in the period to 10.7%. If it’s market share this analyst was referring to, not even the #2 and #3 players combined could stack up to Google - and, inevitably, any merger of those two players would likely amount to some trimming of combined market share in the short term.

Yesterday in a Q&A with the Washington Post, Sun Microsystems’ chairman and outgoing CEO Scott McNealy made comments that might have led to increased speculation - even though Sun wouldn’t have much to do with an equity swap deal, at least directly. In response to a point made by reporter Arshad Mohammed, where he said broadband services customers are generally accustomed to having one or two options. In a world where the major broadband suppliers boil down to Yahoo, Google, and Microsoft, Mohammed suggested, isn’t that one company too many ? McNealy’s response made it seem like he felt Microsoft could be the odd man out.