We didn’t think we would be thinking about the Yahoo Microsoft axis again for some months, but already this week, as the dust settles on Microsoft’s abortive attempt to acquire Yahoo, talks have already begun between the two to look at collaborating on Internet advertising, a move seen as a Microsoft initiative to sustain some kind of balance of power with Google.
During the merger discussions Yahoo managed to get Google to offer help with its search advertising strategy, which would have boosted Yahoo advertising sales, which in turn drove up the price that Yahoo placed on its business. Because Google search is both more sophisticated and backed by more advertisers, Google always earns more for each search carried out. Effectively Yahoo would have been sharing its inventory with Google.
At the time this was perhaps seen as simple stratagem to drive up the share value beyond where Microsoft was happy going, and circumvent the deal. Now that job is done, there may be little benefit in following through on the Google deal, and instead a similar deal with Microsoft may create a more balanced internet advertising market.
Of course even though the merger talks are off, there are repercussions which are still reverberating around Yahoo shareholders. Activist share holder Carl Icahn has bought heavily into the stock and is now seeking to put new board members in, who will vote for in favor of putting the merger back on the agenda.
We said at the time the deal was first announced that it looked the right move for both companies and said that when there was time for reflection everyone would see that this was a good merger to come back to. At present Microsoft and Yahoo together have around 30% of the search market, with Google taking a giant share of 60%. If Yahoo and Google tried to work together the chances are that there would be anti-trust implications and if these were successfully overcome, Microsoft would be edged out of the search market permanently, and search is a dominant part of the growing internet advertising pie.
But just because two search players might merge their inventory, it would not overnight guarantee an increase in revenue for either, the way a deal with Google might. The same goes for any AOL merger or advertising relationship with Yahoo.
While there remains any chance that Yahoo might be acquired, its share price is stronger than when Microsoft first made its surprise bid, though it has fallen away somewhat. Investor sentiment appears to be saying ‘ ‘There’s probably a deal for the company somewhere,’ but if that turns out not to be true, its share value could soon be in the doldrums once again.