Yahoo
Under the 10-year agreement, aimed at challenging Google Inc., Yahoo will use Microsofts Bing search engine on its Web sites. Yahoo, in turn, will sell ads that appear next to Internet-search results.
Yahoo shareholders may be upset that the company isnt receiving an upfront payment from Microsoft, which some analysts had expected to be as much as $3 billion, said Benchmark Co.s Clayton Moran. Yahoos projected cost savings and the portion of revenue it keeps from sales of Web ads both fell short of some predictions, he said.
“This deal was a big disappointment,” said Moran, an analyst in Boca Raton, Florida. “They needed this deal, and it shows in terms of how the negotiations were concluded.”
Yahoo, based in Sunnyvale, California, fell $1.94 to $15.28 at 12:12 p.m. New York time in Nasdaq Stock Market trading, the biggest intraday decline since November. The stock had gained 41 percent this year before today. Microsoft rose 9 cents to $23.56, while Google lost $4.48 to $435.37.
The agreement gives Microsoft, the worlds largest software maker, more users for Bing, which has about an eighth of Googles market share in the U.S., according to research firm ComScore Inc. Both companies have failed to claw users away from Google and are facing new competition from startups such as Facebook Inc. and Twitter Inc.
On Again, Off Again
The partnership marks a victory for Microsoft Chief Executive Officer Steve Ballmer after 18 months of on-again, off-again negotiations between the two companies. Yahoo spurned Microsofts offer to buy it outright in 2008 for as much as $47.5 billion. Yahoo also rejected a takeover of its search division later that year. Ballmer has said continually since then that he had ruled out a full acquisition of Yahoo, saying he was most interested in the search business.
Yahoo will add about $500 million a year in operating income and save $200 million in capital costs, the companies said today in a statement. That will occur when the deal is fully implemented, which is expected two years after approval from regulators. The agreement should boost Yahoos annual operating cash flow by $275 million, the companies said.
No Upfront Payment
“Having a big cash payment upfront doesnt really help us from an operating standpoint,” Yahoo CEO Carol Bartz said during a conference call. “As far as were concerned, the boatload of cash is us preserving our revenue line.”
Yahoo will keep 88 percent of the revenue from Web-search ads on its own sites for the first five years of the partnership, the companies said. Redmond, Washington-based Microsoft will also guarantee how much Yahoo makes from those ads in the first 18 months after the agreement starts in each country.
Yahoos shares are declining today because shareholders flocked to the stock in the past several weeks as speculation about a deal grew, Bartz said. Some of them are now selling, she said.
Antitrust Review
The companies expect the agreement to be closely reviewed by regulators, with the deal closing in 2010. Microsoft plans to begin seeking antitrust approval in the U.S. next week, General Counsel Brad Smith said on the conference call. Microsoft can make a good case that the deal boosts competition, even though Google may oppose it, Ballmer said.
The deal “warrants our careful scrutiny,” said U.S. Senator Herb Kohl, the Wisconsin Democrat who heads the Senate antitrust panel. Lawmakers are concerned about “dampening the innovation we have come to expect from a competitive high-tech industry,” he said in a statement.
Google said it was “interested” to learn of the deal. “There has traditionally been a lot of competition online, and our experience is that competition brings about great things for users,” the company said in a statement.
Together, Yahoo and Microsoft hold about 28 percent of the U.S. search market, compared with Googles 65 percent share, according to June data from Reston, Virginia-based ComScore. Separately, Yahoo had 19.6 percent, and Microsoft had 8.4 percent.
Industry Slump