Google beat the analysts’ expectations again last week, releasing higher-than-expected earnings per share results.

This confirms once again that during a period of economic turmoil, people resort more to the online advertising medium because it provides more flexibility and more control over advertising programs. This is favorable to Google, with the majority of its business revenue coming from online advertisement.

And for credit crunch periods like the one we are in now, we have to note that this is especially favorable for companies with a large cash reserve, like the one in Google’s balance sheet. Google had $14.4 billion in cash at the end of September 2008.

But this acts not only in Google’s favor, but also in Microsoft’s. This is the time for these two companies to exercise their buying power to acquire companies with distressed cash flow.

I consider now to be an especially favorable time for Microsoft to raise again their proposal to acquire Yahoo! due to their distressed stock prices, and that a new offer no longer needs to be near to its original US$31 per share quoted at the beginning of this year. Just 10 months later, Microsoft could probably reach a deal for a much lower purchasing price. Although, many people believe that Microsoft is now interested primarily in the search technology of Yahoo! rather than the whole Yahoo! that includes many of its successful content sites. Perhaps Microsoft will only continue the discussion after the rumor regarding a merger between Yahoo! and AOL becomes reality.

Google cannot exercise the same tactic due to the anti-trust concerns of various governing bodies. The combined search market share could easily exceed 90% if Google merges with Yahoo. So this time Microsoft has an advantage over Google with the possibility of buying the whole or part of Yahoo!

Perhaps Yahoo! merging with AOL and selling its search technology to Microsoft is a better way out for Yahoo! shareholders. This frees them from the unfavorable market condition they have been enduring for the past few years. Considering their search technology is facing an uphill battle against Google, it is better for Yahoo! to remain focused on building content sites and leave the search business to the financially stronger Microsoft to continue developing (and hence battling with Google).

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Tags: Google’s quarter results, Microsoft’s acquisition of Yahoo!