Yahoo, Microsoft Left Searching

Without a merger, the two tech giants are back where they started, floundering behind Google in online search

by Robert Hof

As nearly every company involved with the Internet reels from the implications of Microsoft's surprise May 3 withdrawal of its unsolicited $45 billion bid for Yahoo, two questions remain unanswered: Does Steve Ballmer's "no" really mean no? And if it does, what's next for Yahoo and Microsoft?

Only Microsoft Chief Executive Ballmer and Yahoo (YHOO) co-founder and CEO Jerry Yang can answer either question, and they're keeping their own counsel for now. However, a source close to the talks, which heated up only in recent weeks after more than two months of negotiations via press leaks, indicated Microsoft (MSFT) does not appear to be walking away (BusinessWeek.com, 5/3/08) simply as a negotiating tactic. Moreover, it seems clear that although Yahoo was for sale at some price, that price was high enough to indicate it much preferred to remain independent—even with the likelihood of lawsuits by shareholders angry at the deal going south. As expected, Yahoo shares tumbled on May 5 with the resumption of trading, off 19% to 23.29 on the Nasdaq.

But the grim reality is that prospects for both parties apart now look worse than ever. "Due to this exercise, both companies are weaker now," says Tyler Moebius, CEO of the online advertising network Adconion Media Group. Talent continues to stream out of both companies' ad operations. He says that a third of the 75 people he has hired in the past year came from Yahoo or Microsoft.

Longer term, a number of people in the industry think Microsoft and Yahoo still could make a mark. "Google has very little presence in the display world," notes Joe Apprendi, CEO of online ad network Collective Media. "Yahoo could have an edge in catching up to search vs. Google catching up in display." Meanwhile, Microsoft is spending hundreds of millions of dollars trying to build out its own ad capabilities. But the question remains whether Microsoft or Yahoo can avoid losing so much ground in the short term that any long-term progress will prove too little, too late.

A Win for Google

The two companies' positions look especially frail versus their common enemy, Google (GOOG). If there's one company that benefits from the failure of the blockbuster deal, it's the search giant, whose march through the advertising world remains virtually unchecked. "Its two main competitors are separate and floundering," says Clay Moran, an analyst with Stanford Group. "We think Google's the winner."

That's why many people are not entirely convinced by the posturing of Microsoft and Yahoo officials last weekend, which maintained that the deal is irretrievably kaput. They find it hard to believe that Ballmer would go to all the trouble of spending three months pursuing Yahoo for $45 billion, only to chuck the deal on a price difference of $5 billion or less when the stakes vs. Google are so high. "I have to believe they will get back to the table," says Anant Sundaram, a professor of finance at Dartmouth College's Tuck School of Business, who has followed the deal's machinations.