Microsoft might buy YHOO or eBay, says Merrill

This just in from TheFlyOnTheWall.com (subscription required): A Merrill Lynch analyst has issued a report speculating that Microsoft will soon buy another large Internet player.

The reason -- if it isn't obvious -- is Google's increasing competitive threat. As we've written about obsessively on our Google blog, Microsoft is not only fading in its battle to keep up with Google's Internet traffic gains, but it is also facing imminent threat from Google's software launches.

Merrill believes Microsoft should fight back by buying Yahoo!, for  which it could pay $40 to $45 a share. The analyst believes the strategic benefits to such a deal would outweigh any dilution.

Merrill also thinks Microsoft could buy eBay, but he thinks the strategic benefits wouldn't be as great.

I've written before about how all the talk of an impending giant Internet merger this Spring seemed like a lot of trumped up speculation. (See, "A merger between eBay, Yahoo, Google or Microsoft? I don't buy it" from May 24.). But now that Merrill is jumping on the bandwagon, I'm not so sure.

The walls between research and investment banking are supposed to be very high and thick, but I still think that bits of information can find their way through the cracks. This could be one such case.