I think they considered all studios in the industry. The difference is that Phil asked MS to do an offer to Sega, offer which was cancelled due to the ABK initiative.
As for Square, logical reasoning is that Square would not be positive about such offer.
This is what MS thought of the market before proposing to ABK. Remark that things may have changed a bit, including the fact they filled some holes with ABK and that some potential targets have been bought or changed of status. Thank you to the trial to make this document appear. We can see that Square is not on that list. Also, not Avalanche despite many rumbles.
Square would have their benefits for sure but SEGA gives them JRPG’s (much better ones quite frankly) as well as many other big franchises, and targets mobile and PC heavily
MS already tried to buy Square (and nintendo) in the past, without success. It would be a bad idea, even if doable, with a massive departure of talents.
Sega is a bit different, more western minded. In fact there was talk about buying Sega after Dreamcast death (the idea came from Sega), but ironically, Bill Gates found Sega of not enough value regarding the asking price.
I would think one of the reasons to get Sega now would be to have a strong foundation in Japan and Asia to some point. Sega in my opinion still needs a lot of help if they are to revisit their IPs of old like Shinobi, shinning Force, Phantasy star rpgs, Altered beast, Golden axe, Nights, Virtua fighter series and many more. Bringing many of this IPs to relevancy in the modern age will be too expensive for the current Sega.
This discussion was mostly to hilight the specific details brought to light through the court documents. The ongoing discussion if its not directly about the documents should probably be part of the Xbox Acquisitions discussion.
Square would have a huge psychological impact for sure on people, but in terms the best fit I think Sega is high up there as the best acquisition to aim for.