In response to the  Deal or no Deal?  article recently published in Fortune.   –

FORTUNE: "Buy AOL. Swallowing AOL won’t transform Yahoo, but would give it increased traffic and a shot in the arm for its search-advertising business.   The real question is whether Time Warner wants to sell. "Time Warner has a new strategy for AOL and is not contemplating any deals," says a company spokesman.   Citigroup analyst Jason Bazinet estimates AOL is worth about $13 billion. Of course, Time Warner might demand more."

PTI: AOL is an old dog. Yes, it has traffic, but so what?  It has not been to capitalize it and has been loosing money big time.  Yahoo has enough traffic on its own — it is #1 site in the world based on traffic. It has not been able to capitalize it, so why buy AOL if it had not figured out the traffic capitalization part either? 
What are they going to figure out together?  Big mergers rarely work; potential clash in two corporate cultures is something managment will have to work on vs. to concentrate on how to capitalize traffic.

FORTUNE: "Sell to Microsoft. If Semel can’t buy AOL, the best move for his shareholders may be to sell the company. Both Yahoo and Microsoft’s MSN have struggled against Google to cash in on search advertising. Integrating Microsoft’s codehead culture with Yahoo’s Internet vibe would be problematic. But buying Yahoo would be a triumph for Microsoft, giving it a major beachhead in Silicon Valley. If such a merger were to occur, the combined Yahoo and MSN would have 2006 net revenues nearly equal to Google’s expected $7 billion."

PTI: Microsoft is a software company.  Most, if not all of their entertainment (and online) initiatives are still grossly unprofitable.

Yahoo is an entertainment company.  Search has become only secondary to its entertainment business.  In fact, it never was its strongest side.  Why do we go to Yahoo? — not to search (Google is for that), but to check email (where, in spite of all Goggle’s whistles and bells, Yahoo is still ahead of Google mostly due to being first comer),  to check ‘MyYahoo’ with RSS feeds to see what news / blog post is hot today, to (maybe) glance at Yahoo home page to see what they highlight today.

The two (MS and Yahoo) will just not merry well.  Microsoft’s market cap ($290 Bil) exceeds Yahoo’s cap ($37 Bil) almost 8 times.   If acquired by Microsoft, Yahoo, most probably, will follow the sad destiny of Altavista — caught up in between the corporate (often bureaucratic) agendas, it will be shuffled from one department to another and will eventually get lost in between.

I personally will feel very sorry.  I like My Yahoo page and my email — they keep me sane when all else fails. 

FORTUNE: Merge with eBay. The two sites occupy different corners of the web, so they’d be complementary. Indeed, eBay ( Charts) and Yahoo already are stitching together a comprehensive cross-selling initiative in the U.S., and each is wary of Google. The two have discussed mergers over the years, so there’s a long history there. But however appealing it may be, an eBay-Yahoo merger appears unlikely, say people close to the two companies, precisely because of their vastly different focuses.

PTI:  Exactly, the two have two different focuses.   One (Ebay) sells or rather helps sell stuff — physical stuff, and makes money on every transaction.  The other (Yahoo) sells advertising space — digital space, not physical stuff (yes, it has made some attempts to sell physical stuff as well, but Yahoo Shopping is not even in the top 20 Yahoo properties).

In trying to align one to another, they may lose both spaces (selling stuff and selling ads) to Google.  Google is not sleeping and will pick its forces with its Froogle and Google Base to come come after Ebay in addition to Yahoo.

FORTUNE: Stay the course. This is Yahoo’s party line. Semel says that if Yahoo can do better at monetizing search ads and exploit new areas like ads on cellphones, videos, and social-networking sites, it will do just fine. "With the landscape changing, I am very, very excited about the opportunities for Yahoo," he told investors in mid-October, when Yahoo reported its disappointing third-quarter results. Let’s see if Yahoo’s board is as patient as Semel.

PTI: Out of all choices listed above, this one, IMHO, is the most viable.  Traffic is already there — Yahoo does a good job attracting "eyeballs" — they now have to figure out how to put systems in place to capitalize that traffic.  This would involve making the buy/sell part of adwords, banners, text more appealing to advertisers –  so they could (at least perceptions wise) make their cost/benefit analysis make business sense.  

For this, to get new ideas, Yahoo may consider buying:

• Blu Lithium and see if their technology can help cash in on traffic.
• aQuantive that has been successful in building its portfolio and business in on-line advertising.   aQuantive may nicely complement Yahoo and give new blood to capitalizing Yahoo’s traffic and working with advertisers.
• ValueClick  – this idea is byNicole Ridgway  of Techsmart, SmartMoney
• Nextmedium – not exactly in the online ad business, but still in entertainment. It automates the process of product placement in TV shows, movies and videogames. Something Yahoo might want to get their feet into to get closer to ‘Hollywood’ entertainment.