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Tickers in this Article: YHOO, GOOG, MSFT, TWX
Internet search giant Google (Nasdaq:GOOG) pulled the plug on an internet advertising partnership with Yahoo (Nasdaq:YHOO) last Wednesday, abandoning efforts to overcome objections from antitrust regulators and customers. Because the deal had been headed in this direction for some time, the news should not come as a shock. Had the deal come to fruition, however, it would have translated into huge gains for Yahoo's bottom line.

Although Yahoo has faced a major setback, all is not lost.

A Google Of A Would-Be Deal
To many, the Google deal was far from the best option for Yahoo because it would have required Yahoo to surrender control to its biggest competitor. At the same time, to keep regulators happy, Yahoo would be required to maintain its own search engine technology and cost base. A deal with Microsoft (Nasdaq:MSFT), on the other hand - or better yet, a sale of the business to the software giant - would eliminate these costs completely and create more value for shareholders. (Find out the strategies corporations use to protect themselves from unwanted acquisitions by reading Corporate Takeover Defense: A Shareholder's Perspective.)

With Google's exit, Yahoo could push harder for a deal with Time Warner (NYSE:TWX) for its AOL internet unit. However, this alternative is highly unlikely because Yahoo would have to employ shares to make a purchase. Sure, Time Warner would love to unload AOL onto a willing buyer. But with more than $37 billion in long-term debt, Time Warner would prefer cash over shares as payment. Time Warner is better off holding onto AOL and its rich, albeit rapidly dwindling, revenues and cash flow.

A Window Into Microsoft's Online Soul?
Microsoft CEO Steve Ballmer now dismisses the idea of acquiring Yahoo But that doesn't change the fact that Microsoft needs Yahoo. Despite heavy investment in research and development, none of Microsoft's online initiatives have gained much traction. Losses at the software giant's online services business continue to grow. Therefore, Yahoo could provide the online service platform that Microsoft sorely needs.

While Ballmer's recent statements rule out the possibility of a full-blown acquisition, no factors would prevent other Microsoft-Yahoo combinations. The two companies could reach a deal that mirrors the proposed search engine partnership with Google. Or, even better, Microsoft could trade its online business for a stake in Yahoo.

Popular And Cash Happy
In any case, Yahoo is not likely to plunge suddenly into the red or shrivel up and die. The company has $3.3 billion in cash and short-term marketable securities as well as zero debt. Further, it is anticipated that Yahoo will generate $1 billion in free cash flow this year. Although its cash flow number is down from the $1.4 billion it saw in 2008, $1 billion is still a hefty sum.

Yahoo's portals attract over 500 million users per month and saw an increase of 17% in page views during the third quarter, over the same period last year. Even if Yahoo gets hit hard by the economic downturn, the popular online destination still possesses enormous brand value - something that could be exploited successfully by a big tech company. (Withdraw information about free cash flow at Free Cash Flow: Free, But Not Always Easy.) Bottom Line
There is life left in Yahoo!

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