There have been rumors for some time that to solve their mutual problems, Microsoft might buy Yahoo!. Whatever cultural issues existed that might block the move, valuation was always a problem. However, Yahoo! is down from a little under $44 earlier this year, to around $25 now. And, oddly enough, at $27.20, Microsoft is nearing its best price since late 2004.

Yahoo!'s market capitalization has fallen to $34.5 billion. The company has about $2.5 billion in cash and short-term securities and $750 million in debt. That brings the cost to acquire the company as low as $33 billion. Yahoo!'s twelve-month trailing revenue is almost $6 billion and cash flow from operating activities is approximately $1.7 billion. So, Microsoft would have to pay a little over five times revenues and twenty times cash flow.

Expensive. Maybe.

It depends on what value Wall St. would give to such a potentially huge strategic advantage in Microsoft's war with Google, not to mention Yahoo! is already profitable and still growing.

Microsoft's market cap is now up to $271 billion. Cash and short-term investments are over $33 billion. Cash flow from operating activities is over $14 billion a year.

In short, with all the complaints about what MSFT will do with its cash, it could come close to buying Yahoo! without talking to a banker.

For a number of years, Microsoft has suffered from the perception that it cannot do anything beyond making operating system and server software. They have been good businesses, great businesses, but the company's move into the Internet portal business, game platforms, and software for mobile devices has not drawn much applause from the investment community.

With the Xbox platform receiving a more favorable impression from the market, Microsoft is beginning to trade like a company that investors believe has some market upside. Taking the lead in Internet audience and pulling equal with Google in search could cement that.

Douglas McIntyre is a partner at 24/7 Wall St.