Yahoo-Google Search Test: Brilliant Counter-Move That Should Extract Higher Price From Microsoft

The Yahoo-Google search test is a brilliant counter-move by Yahoo in the Microsoft-Yahoo takeover battle. It is not smart because it is a credible "Microsoft alternative" -- it isn't -- but because it should allow Yahoo to extract a higher price from Microsoft.

This search test won't block a Microsoft deal, and neither would a full-blown Yahoo-Google search partnership. But if the test works well, it will bolster Yahoo's argument that Yahoo is worth considerably more than Microsoft's current bid, by holding out the promise of increased revenue and reduced cost from a full-blown outsourcing deal (analysts estimate that the benefits to Yahoo could be as much as $300-$500 of incremental EBITDA). And Yahoo has already lost the search game anyway, so such a partnership offers little risk to Yahoo.

Meanwhile, as Microsoft's instantaneous response demonstrates, the partnership will scare the heck out of Redmond. With Yahoo in Google's search camp, Microsoft would become even more irrelevant in search (not to mention display). Unlike Yahoo, however, Microsoft's pride would never allow itself to outsource search to Google, which means it would stay irrelevant in search forever (as its share of queries gradually approached zero). All of which means that, if Yahoo and Google appear headed toward a full-blown search deal, Microsoft needs to buy Yahoo even more now -- if only because it will then be able to fire Google as Yahoo's search partner.

How will Microsoft respond? It will run straight to the antitrust authorities and scream that a Yahoo-Google search partnership is terrible for capitalism, consumers, innovation, etc. But if this test merely leads to a partnership in which Yahoo runs AdSense on its pages, it's hard to see why anti-trust folks would prevent such a deal. All Yahoo would be doing would be buying Google products and taking Google money, and Yahoo doesn't have enough share of the search market anymore for this single deal to constitute collusion between two companies who control the market (only one of them controls the market -- and it will continue to, with or without Yahoo). From Yahoo's perspective, why should everyone else be able to live off Google when Yahoo can't? This isn't like previous anti-trust examples, where, say, Microsoft pointed a gun at Dell's head and said "take IE or you don't get Windows."

Some legal experts do say that a Google-Yahoo partnership would be problematic (Senator Kohl has already promised to look into it), and, in any case, Microsoft would be able to make a lot of scary noise. Of course, if the test works, Yahoo will be able to demonstrate a big revenue lift, and Yahoo shareholders will be able to make a lot of angry noise about how Microsoft is paying way too little for the company in light of Yahoo's recently discovered revenue goldmine.

And this would leave the companies with only one graceful way out: Microsoft jacks its bid to at least $35 and Yahoo accepts it.

See Also: Yahoo Board Bumbling May Have Already Cost Shareholders Billions

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Comments

[Synoia]

How would Microsoft & Yahoo compete with Google?

Two items undermine this acquisition:

1. If Microsoft was serious about the internet, they'd be leading the Software-A­s-a-Servic­e market by selling Windows & Office subscriptions over the internet. If this was succesful, Microsoft would have the"eyeballs" & would not need Yahoo.

2. Yahoo has not succeeded in the online advertisng business, when compared with Google.

So dear investor, forget the technology. Ask how will the combined companies attract consumers, or "eyeballs"? What's the marketing strategy? Why is this acquisition good for the Microsoft shareholder?

Looks like Vista for the internet - Technology & ego driven, and not focused on giving consumers any reason for consumers to buy the combined product. This is "a dog chasing a firetruck strategy" - what will the dog do with the firetruck if the dog catches the firetruck?

I suspect Google would like to see Microsoft waste this amount of money. Two failures to win in the internet space make one big more expensive failure, not a success. Yep, Vista for the internet.

[ObGyn]

Henry Blodget, what are you doing these days? I haven’t forgotten how you misled investors 1999-2000. How do you sleep at night? Which stocks are you pimping these days? How is CMGI? How is ICGE these days?

I heard that you would be going to jail for conflict of interest in the bubble stocks you were promoting while getting outrageous fees from the CEOs through your employer’s banking side.

[Reaganwater]

ObGyn is abusive to put it mildly " "lisping like a homosexual", " you are lying again." When are you going to get your head out of your ass? ",The voters are just simply very stupid" ,"Your family is in harm's way because they are unqualified to make a living doing something else."
The above quotes & others ARE JUST FROM TODAYS POSTS .
Henry pushed too hard and crossed an ethical line .This in response to contradictory internal and external competitive pressures associated with his line of work at the time. But to be barred for life -- come on ! and by WHO ??? Why, who else ? but that paragon of partisan probity Elliot Spitzer. The insight and experience Henry offers are a great addition to Huffpo and Slate and anywhere else he publishes.­His writing is valuable analysis from one of the very few who has proven himself , in the actual marketplace of Wall St .So please spare us all your pathetic perfectionist judgementalism .Especially since it is highly unlikely that you would want such a standard imposed on you for any mistake in judgement you might make. I for one hope he
is reinstated at some point. A news flash for you : top market and securities analysts make very good money because the market deems them to be worth it. Just like top doctors ,managers ,engineers Etc . Thanks for your input Henry .
I look forward to your next contribution.

[navalvet]

I have been free, at least at home, from Microsoft for three years and loving it. The first version XP really soured me on their product. When that bleeding paperclip started demanding my attention, I screamed in irritation. When they sent me a flyer about MSN, in 1998, it was unintelligible. When I clicked on their ad for "Live Search," I could not understand what was being sold. I cried when my firm stopped using WordPerfect.
Microsoft is the best example of what is wrong with monopolists, they provide a poor and expensive product. When they try to enter a field with competition, it has cost them plenty. What is the market share for MSN.com? How many Zunes are out there?
In any case, Microsoft are fools if they think they could get a lead on Google by buying Yahoo! Yahoo! stockholders should not be suckered into selling cheap.

[thedirtman]

I think this hits on how Microsoft can purchase Yahoo without antitrust violation accusations. By offering a poor product like search engine MSN.com that gets only 9% of the market share they can later buy an undervalued Yahoo that takes in 22%. If MSN.com had been as successful as Google, then the combined Google/Yahoo marketshare becomes too great.

[ProgressiveBum]

More power to Yahoo! Microsoft is not the company you want to become part of.
Microsoft has initially amassed a huge chunk of cash due to an exclusive deal with IBM to provide an arguably inferior DOS (operating system) for the IBM PC in the early eighties. The resulting large user base guaranteed cash flow as users upgrading through various versions of Windows (and Office).
As a result, Microsoft never had an incentive to innovate. And they never did. They just bought out innovative companies (i.e. Hotmail), and if they couldn't buy innovation, they used anti-competitive behavior to push innovative companies out of the market (i.e. Netscape).
Looking into the future Microsoft will experience declines in cash flow. For one, there are office suites online (i.e. OpenOffice.org) that are freely available for download, and cloud computing (i.e. Google apps).
Vista has been a debacle, which forced MS to continue supporting Windows XP until they release Windows 7 sometime in 2010.
Bottom line: MS needs Yahoo more than Yahoo needs MS.