The deal that won't die -- and why

Ballmer liked Yahoo at $42 bln, still interested at 50% off

Steve Ballmer just doesn't seem able to let go of the notion of partying in Sunnyvale.

The reason he still wants Yahoo is the same one he's had for two years now.

Unfortunately, Google's better-than -expected earnings report showed once again how futile Ballmer's hopes in the search ad market will likely be.

Ballmer's comments today that a deal still "makes sense economically" is an understatement, especially for Microsoft investors.

It turns out that Chief Yahoo Jerry Yang did Ballmer a huge favor by turning down his takeover offer earlier this year, which was worth north of $40 billion.

Yahoo's shares have been in free fall ever since. Today, courtesy of its continued market share losses to Google, management defections, general disarray and widespread financial mayhem, Yahoo's market cap is $18 billion.  

And that was AFTER Yahoo's stock leapt on Ballmer's comments today, to a whopping $13 a share, up from a six-year low.

I'm trying to imagine how Ballmer would have explained to his own shareholders the merits of buying Yahoo at $33 a share just before the bottom fell out of tech stocks -- hell, all stocks.

If Ballmer is serious, and Microsoft was to offer a 50% premium, at around $20 a share, my guess is Yang and the Yahoo board would take the money this time around.

How else to compete with Google, which continues to generate piles of cash at a time when cash is king? Not long after Ballmer's remarks, Google issued a report that hinted at why an economic downturn might actually be good for Google, at least relative to its rivals. 

If advertisers do cut back on spending, they're likely to cut back last on advertising that gets measurable results. No ad format is as accountable as paid search, which is why Ballmer wants to boost his share of it. Online display advertising, looks sure to take a major hit as major financial companies, which were some of the biggest buyers of display ads in recent years, disappear from the scene.

But the problem for Ballmer is that few companies dominate a market the way Google does search, now garnering two of every three dollars spent -- a share that rises every month.

All of which means that Ballmer may simply be too late in his quest to make Microsoft a major player in the search advertising market. Even giving stuff away for free hasn't helped.

In a return to the earlier head games Microsoft used on Yang, the company quickly issued a statement saying it had no interest in aquiring Yahoo.

But if Ballmer does act on his obsession and ends up buying Yahoo, at least he's now got an easy way of explaining it to his shareholders.

"Look folks -- all of Yahoo, for 50% less than what I thought it was worth six months ago!"