Yahoo closes door on Microsoft with Google ads deal

 

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Posted on 13 Jun 2008 at 07:47

Microsoft's plan to establish a strong footing in online advertising has suffered a big blow as merger talks with Yahoo finally failed, with Yahoo allowing Google to sell ads on its site.

Separate statements from Microsoft and Yahoo signalled a real rift between the two after their agonising on-off talks, and Yahoo shares fell 10% as final hopes of a full or partial acquisition faded.

Microsoft shares rose more than 4% as investors showed relief that the company would not be paying too high a price for a deal they considered risky - even though its biggest rivals on the web are to work together.

Yahoo says it has agreed to let Google put search ads - advertisements placed next to search results - on its site in what it calls an $800 million (£411 million) annual revenue opportunity that would boost cash flow by $250-$450 million in the first year.

"Google has made an enormous gain strategically," says Sanford Bernstein analyst Jeffrey Lindsay. "This move might well have shut Microsoft out of the online space altogether."

Google and Yahoo, No. 1 and No. 2 in search respectively, will pit ads against each other in auctions for the ad that pays the most. "Yahoo is being a reseller of Google whenever it makes sense, and that is likely to be a lot of the time, given how much more effective Google web search ads have proven to be," says Global Crown Capital analyst Martin Pyykkonen.

The process is non-exclusive, meaning others could join in the bidding to place ads, a factor that could make a deal easier to pass regulatory approval. The companies agreed to wait three-and-a-half months for regulatory approval and to offer a way to end it if Yahoo is taken over.

Microsoft offer

Yahoo rejected Microsoft's latest proposal, which sources briefed on the subject say included an offer to buy 16% of Yahoo for $35 per share, and to buy its search business. Yahoo says that an alternative Microsoft proposal to buy only its search business did not fit into its plan to grow search and display advertising.

Microsoft's offer for a minority stake was at a premium per share to its early May offer to buy the entire company for $47.5 billion, or $33 per share. Microsoft, which says it is still open to an alternative deal, had hoped a Yahoo deal would help it capitalise on web advertising growth and compete with Google, which is increasingly fighting for the same internet audience.

Yahoo said on Thursday that Microsoft had made it clear in a meeting on 8 June that it was no longer interested in buying the company outright, even at the $33 per share price Microsoft had most recently proposed.

That may not appease Yahoo shareholders - including billionaire Carl Icahn - who have been pressuring Yahoo to reach a deal with Microsoft. Icahn has called for Chief Executive Jerry Yang to be ousted.

End game

Analysts say they don't expect Yahoo and Microsoft to try another round of negotiations. "It certainly seems to be the end," says Derek Brown, an analyst at Cantor Fitzgerald. "In their most recent discussions, they were talking about totally separate visions of both a deal and the future."

Microsoft is expected soon to be on the prowl for other acquisition targets because it has not given up its goal for online advertising. "Microsoft will keep trying," claims Morningstar analyst Toan Tran. "Yahoo is one of the most popular sites on the web, and there is no one else with as much traffic. AOL may be one option, and it may not be as expensive."

Author: Reuters