Is Microsoft lurking around Yahoo now that Google partnership is kaput?

Confirming recent scuttlebutt, Google announced Wednesday that it was walking away from its advertising partnership with Yahoo. According to a press release from the U.S. Department of Justice, the agency had told the pair that it planned to file a suit to block the deal:

“Yahoo! Inc. and Google Inc. abandoned their advertising agreement after the Department of Justice informed the companies that it would file an antitrust lawsuit to block the implementation of the agreement. The Department said that, if implemented, the agreement between these two companies accounting for 90 percent or more of each relevant market would likely harm competition in the markets for Internet search advertising and Internet search syndication.

“The companies’ decision to abandon their agreement eliminates the competitive concerns identified during our investigation and eliminates the need to file an enforcement action,” said Thomas O. Barnett, Assistant Attorney General in charge of the Department’s Antitrust Division. “The arrangement likely would have denied consumers the benefits of competition–lower prices, better service and greater innovation.”

As I wrote the other day, I think the notion that this deal raised anti-trust issues was wrongheaded. And I think Google and Yahoo could have won a court fight. The problem was that this would take time and money. And the deal didn’t really matter that much to Google from a financial perspective to invest all those resources in fighting to save it. Google was doing it, probably, just to thumb its nose at Microsoft and disrupt its bid for Yahoo.

For Yahoo, on the other hand, this is a body blow.

AP’s Joelle Tessler (formerly of the Mercury News!) and Michael Liedtke sum up the damage to Yahoo:

“The retreat announced Wednesday represented another setback for Yahoo, which had been counting on the Google deal to boost its annual revenue by $800 million and placate shareholders still incensed by management’s decision to reject a $47.5 billion takeover bid from Microsoft Corp. six months ago.”


“Without Google’s help, Yahoo now may feel more pressure to renew talks with Microsoft and ultimately sell itself for much less than the $33 per share that Microsoft offered in May. Yahoo shares traded Wednesday morning at just $13.87, gaining 4 percent in a move reflecting investor hopes that Microsoft might renew its pursuit.”

It’s a shame, really, because Yahoo is in the middle of a wholesale restructuring of everything it does, reinventing itself as an “open” company. The problem is that this is evolutionary, and it will take time not only to implement, but also for it to pay off. Especially given the current economic climate. The deal with Google could have bought it some time to see if that new strategy would turn things around. Now, it’s time is much shorter. And so, probably, is the patience of investors.

So, whither Microsoft? I have to believe that Steve Ballmer is licking his chops up in Redmond. Compared to the start of this year, when Microsoft first made its bid public, Yahoo could be had for a song. Back then, Microsoft came in with a bid in the mid-20s, and made some indications that it was willing to boost that to the low 30s before walking away from talks.

I’m still hoping that doesn’t happen, and that Yahoo finds a way to remain independent. I don’t really think a deal is going to help Microsoft, but it might be too tempting to pass up.

The other big factor: Carl Icahn. Now a board member, Icahn presumably bought all his stock in the mid-20s back when he first stuck his nose into the deal. To curry his favor, Microsoft would probably have to come in with a bid that lets him make a tidy profit for his troubles. But would Microsoft really offer up a bid that doubles what Yahoo’s stock is currently selling for?

Ah, let the intrigue resume.


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