Yahoo Embraces Google, Says Adieu To Microsoft
San Francisco – Fresh from a failed courtship with Microsoft, Yahoo on Thursday announced a partnership between archrival Google Inc. and Yahoo Inc. to handle some of its search advertising sales over time, in the hope that this alliance will improve its sagging fortunes and quell a rebellion by stockholders, though industry experts wonder whether Yahoo has not handed over its own house keys in the deal.
“The deal calls for the Internet search behemoth’s expertise to work drawing money from advertising posted next to Yahoo Internet search results.”
The nonexclusive deal brings together the online advertising businesses of Google and Yahoo and comes as a blow to Microsoft, which had been trying to acquire all or part of Yahoo to strengthen its own online business and compete better with Google.
While announcing the pact on Thursday, executives from both the companies described it as a new, more open model for selling online advertising even as they remain competitors. They said that other industries have built islands of cooperation in some markets while vying for revenue in others.
“This deal in many ways reflects an emerging and new structure for the industry,” Google Chief Executive Eric Schmidt said on a conference call. “Certainly we would like to do more business with Yahoo over time.”
With Microsoft seemingly out of the picture, Yahoo is calling on Google to help its chief executive, Jerry Yang, prove he made the right decision last month when he refused to accept Microsoft’s takeover bid of $47.5 billion, or $33 per share. Yang asked for $37 per share, prompting Microsoft CEO Steve Ballmer to withdraw the oral offer.
Yahoo expects the deal may raise revenue by $800 million a year to sales in its first year and will provide an extra $250 million to $450 million in incremental operating cash flow, Sunnyvale, California-based Yahoo said in a statement. The companies will holdup running the program for up to three and a half months to give the U.S. Justice Department time for review.
“We see this as a good, open, flexible deal and one that helps Yahoo be strengthened as a good longer-term competitor,” Chief Executive Jerry Yang said in a conference call Thursday.
Some saw more urgent motives at work, though.
“They are using this as a tool to boost short-term cash flow,” said Canaccord Adams analyst Colin Gillis. “They are trying to keep the wolves at bay.”
The news unveiled Thursday caused Yahoo shares to fall 10 percent as investors deserted hope that Microsoft would renew a nearly five-month quest to buy the Sunnyvale-based company.
The partnership with Google will give a major potential boost to the amount of money Yahoo gets when people click on ads, (provided that Yahoo generated income of $1.53 billion in its most recent quarter, after ad commissions are subtracted) is part of Yang’s effort to deflect criticism from investor Carl Icahn, who blamed Yang for scuttling a $47.5 billion bid from Microsoft.
“Renouncing search to Google puts Yahoo in an indefensible strategic position in order to obtain short-term gains,” Soleil Securities Group Inc.’s Laura Martin said in an interview. The Los Angeles-based analyst advises investors to hold Yahoo shares.
Yahoo is attempting to ward off a shareholder revolt led by activist investor Carl Icahn, who has vowed to replace the company’s board because of the way the directors handled the Microsoft negotiations.
Though Icahn has been eager to persuade a sale to Microsoft, but some shareholders are reluctant to support his attempted coup unless he can demonstrate his slate of directors has a better turnaround plan than the current board.
Icahn did not return phone calls seeking comment Thursday.
However, the fate of Yahoo’s board is planned to be determined at the company’s Aug. 1 annual meeting.
“If you are a Yahoo shareholder, you simply have to be scratching your head right now,” said Standard and Poor’s equity analyst Scott Kessler.
The deal, which encompasses sites in the U.S. and Canada, may add as much as $450 million in operating cash flow in the first 12 months, Yahoo said. The alliance is not exclusive, meaning that other companies in addition to Yahoo and Google will be able to sell ads to appear on Yahoo’s pages.
“Undoubtedly it is time to move on,” Yang said during a conference call. “We believe this agreement with Google helps us to do so by strengthening our competitive position and generating attractive financial benefits.”
Yang and Sue Decker, Yahoo’s president, said the pact will facilitate Yahoo to capitalize on growth in the online advertising market and “the convergence of search and display advertising.”
They stressed the flexible terms of the agreement for Yahoo. Yahoo will be able to choose the search term queries for which Google’s advertisements will appear, and also the pages on which they appear.
Advertisers will compensate Google for its ads that are shown by Yahoo searches, and Google will then pay a portion of the revenue to Yahoo, Decker said. “We improve our access to the paid search universe, but on terms that work for us,” she said.
Yang and Decker stressed Yahoo’s capability to follow its own strategy, though they tipped their hat to Google’s ability to “perform especially well” in some areas of search.
Google and Yahoo started talking about a partnership in early February, soon after Microsoft offered to buy Yahoo, said Google chief executive Eric Schmidt.
“The most interesting discussions were those that took place in buildings that Yahoo owns in unknown and untraceable locations,” Schmidt said during a conference call with analysts and reporters.
Schmidt stated that it was through the past few weeks that he and Yahoo chief executive Jerry Yang had “serious discussions” and teams spent sleepless nights pulling together a deal inked Thursday.
Google co-founder Sergey Brin said it is “very exciting” to be working with Yahoo and its founders David Filo and Yang, whose time as students at Stanford University overlapped that of Brin and Page.
“We share quite a history and culture,” Brin said. “It was David Filo and Jerry Yang that encouraged us to start a company that, in turn, became Google.”
Brin continued, said the main concern is ensuring that Yahoo remains “a strong independent company.”
The Yahoo-Google deal has a four-year preliminary term, and two three-year renewals, at Yahoo’s option. The deal can be terminated by either side if there is a change of ownership at Yahoo or Google. If Yahoo is bought within two years, it will have to pay a termination fee of $250 million. That fee may be reduced by revenue earned by Google from the agreement.
If the Google deal goes through what is likely to be a stringent review by U.S. antitrust regulators and lawmakers, Yahoo intends to use it rival’s superior search technology to display ads on its own Web site as well as those of its partners” in the United States and Canada.
The alliance may set up a stiff antitrust fight over whether it hurts competition. Microsoft has stated that a pact between Yahoo and Mountain View, California-based Google will put more than 90 percent of the search ad market in Google’s hands.
The Senate Antitrust Subcommittee will scrutinize the arrangement, said Chairman Herb Kohl, a Wisconsin Democrat.
“This partnership between two technology giants and direct competitors for Internet advertising and search services raises important competition concerns,” Kohl said in a statement.
Google controls almost two-thirds of all searches in the U.S. The company got as much as 70 percent more revenue than Yahoo for each search query at the end of last year, according to Yahoo.