I’ve neglected to talk about Microsoft’s well-known bid to buy Yahoo! early this year. People were excited by the news, since it may have vastly over-valued Yahoo! at the time, hell even with the immediate $10 jump in the stock-price after the announcement, the stock price was still lower than Microsoft’s buyout offer. However, Yahoo!’s Board of Directors managed to successfully resist the buyout offer. Of course, stockholders were pissed about this, since they were more concerned with getting Microsoft’s money than what was good for Yahoo! or the industry. The stock price dropped over the month of June back to almost it’s six-month low.

Carl Icahn, who had absolutely no association with Yahoo! until the Microsoft deal started going south, bought up a bunch of Yahoo! stock in mid-May and has proceeded to attempt to unseat the current Board of Directors for their ‘irrational’ reaction to Microsoft’s offer and the disservice that he feels that they did their shareholders by refusing it. Needless to say the ~50 million shares of Yahoo! stock that Icahn owns are going to net him a solid bit of cash if he can force Yahoo! to sell.

Now, news is starting to hit the street that Icahn has been in talks with Steve Ballmer, who has allegedly indicated that he might be interested in making another offer, if the Board is changed. Mind you, this is pretty much hearsay from Icahn, and it’s entirely possible he’s exaggerating comments that Ballmer has made (it’s very likely they’ve been talking) to drive Yahoo!’s price back up, though what he’s quoted Ballmer as saying are pretty vague already.

Icahn’s reasons for his actions are simple. He is simply looking out for the money. Unfortunately, so are the majority of Yahoo! shareholders, but such is life with a publically traded company. And if you look at what would cause the best, short-term increase in value for the Yahoo! shareholders, taking the money is a great idea. But, is it good for those shareholders in the long term? Is it good for the Industry in the long term? As for the shareholders, it’s hard to say at this point if Yahoo! will ever be the powerhouse they once were. But then, it’s likely that this is largely an image problem. Yahoo! has an enormous number of users, who are incredibly loyal. Yahoo!’s Mail Service is still considered bigger than Hotmail and GMail. Yahoo! Buzz has users who have never (and likely never would) heard of Digg. Yahoo! has frankly done a lot to bring Web 2.0 services, including Flickr, to users who never would be exposed to them another way. Do we need a Digg clone? Probably not, but users who like Buzz are more likely to be attracted away to something more similar, or users will be attracted to Buzz due to the convenience of having it tied into Yahoo!’s user system.

It makes sense that Microsoft wants Yahoo!. Yahoo! is an understated company, largely because they don’t make news the way that Google and Microsoft do. Are they as well off as they used to be? No, but I feel it would be amazingly imprudent to call them a failing company. The AdSense deal with Google, in my opinion, was only made to improve the companies financial situation a tiny bit to make them look better to investors. Ultimately, it did look desperate, and probably won’t help their case in the long term.

However, I believe that this deal would be incredibly bad for Microsoft, Yahoo! and the industry in general. Microsoft and Yahoo! suffer some similar internal problems. There are lots of teams working on various projects, some of which are duplicating effort. Both have poor communication between teams to prevent such duplication. Money is often poured into several competing projects. These are not healthy things for any large company, though it’s not caused too many problems to date. However, the ways in which the companies are different are even more damaging. Yahoo!’s internal philosophy has usually been one in favor of openness. Yahoo! views themselves as a services company, so a fair amount of their source is Open, and they share their technologies in many cases. Microsoft is very, very slowly moving down this path, but a large number of their projects are still heavily based on proprietary data formats and protocols.

I really don’t see any way for these two companies to come together in anything resembling a healthy business. And trying could frankly lead to a really bad situation for Microsoft. Ignoring the problem of bringing the companies together, I think the bigger problem is that this would simply be bad for the industry. We’d end up with less competition. We’d end up with a lot of Yahoo!’s Projects (like YUI losing their corporate support. Who knows what would happen to services like Flickr, which aren’t based on Microsoft technologies? Admittedly, it took Hotmail years to switch from Unix servers to Windows, but it did happen. I suspect a lot of services, that a lot of people use, would be re-engineered onto Microsoft technologies for no reason than Microsoft would either recreate it, or destroy it. Microsoft wants the search part of Yahoo!’s business, but I don’t think they would shy away from the opportunity to destroy the competition that Yahoo! represents, and snatch up any engineers who might work for them.

Yahoo! Shareholders: Please resist the urge to take a quick payout, which frankly is far from a guarantee at this point, and try to make decisions good for Yahoo! in the long term. If Icahn gets his way, there is no guarantee that Microsoft will actually make an offer. Or that they’ll make an offer for as much as they did before. Even then, you may have made a bit of money today, but you’ve likely hurt the industry for a long time.