Posted by: Rob Hof on June 12, 2008
UPDATE 2: After the jump, below, is a draft of a story that will run later tonight. The key takeaway: Google wins big again. The other takeaway: Yahoo’s not getting all that much out of the deal.
UPDATE: Yahoo and Google just announced the long-rumored search ad deal. It sounds like just the deal we’ve been hearing about—a non-exclusive one that leaves Yahoo’s own search ad operation in place. Although Yahoo said it’s not required to get regulatory approval, it said it’s voluntarily delaying it for three and a half months to give the Department of Justice time to review it. It’s also only for the U.S. and for four years with two three-year renewals at Yahoo’s option. All this likely will ease regulatory concerns (though not eliminate them, if Microsoft has anything to say about it, and it will). It also probably means a more limited revenue stream for Yahoo than the $1 billion-and-up estimate some had suggested in recent months. However, Yahoo is estimating the agreement will be an $800 million annual revenue opportunity, and that in the first 12 months, the deal would generate an estimated $250 million to $450 million in incremental operating cash flow.
Microsoft’s recent talks with Yahoo have ended, according to a Yahoo announcement today. The release says talks on either an outright acquisition or Microsoft’s purchase of a part of Yahoo, believed to be its search operation, are both over. According to the release:
The conclusion of discussions follows numerous meetings and conversations with Microsoft regarding a number of transaction alternatives, including a meeting between Yahoo! and Microsoft on June 8th in which Chairman Roy Bostock and other independent Board members from Yahoo! participated. At that meeting, Microsoft representatives stated unequivocally that Microsoft is not interested in pursuing an acquisition of all of Yahoo!, even at the price range it had previously suggested.
With respect to an acquisition of Yahoo!’s search business alone that Microsoft had proposed, Yahoo!’s Board of Directors has determined, after careful evaluation, that such a transaction would not be consistent with the company’s view of the converging search and display marketplaces, would leave the company without an independent search business that it views as critical to its strategic future and would not be in the best interests of Yahoo! stockholders.
The announcement followed quickly on the heels of a Wall Street Journal story online that cited people familiar with the matter saying the software giant abandoned talks with Yahoo over buying the Internet pioneer for $33 a share.
Investors aren’t happy with Yahoo, whose stock closed down 10%. That’s understandable. If there’s no Microsoft deal—and I think that’s still a big “if,” since Microsoft could well come back at some point with another, lower offer—there’s less support for that acquisition premium that has buoyed Yahoo’s stock since Microsoft’s original offer Feb. 1. Meanwhile, Microsoft’s stock, weighed down for months by investor concern about the cost and challenges of a Yahoo deal, rose 4%.
The reason it’s not falling further may be the imminent announcement of a Google deal. But at the same time, investors clearly don’t see that deal as nearly as valuable as the Microsoft buyout offer they had been hoping for. The reason: Any deal that can pass regulatory muster most likely would require Yahoo to keep its own search ad unit in operation.
Indeed, the deal believed to be in discussion at Yahoo and Google would involve Yahoo creating an open search ad auction in which any company, even Microsoft, could participate. Yahoo’s statement indicates that it saw little value to selling off its search operation to Microsoft, so it seems unlikely it would do that with Google either.
What’s more, Google CEO Eric Schmidt said yesterday in San Francisco that if the two companies did a search deal, they would structure it to avoid regulatory concerns. Schmidt also repeated his opposition to a Microsoft-Yahoo deal. “We think an independent Yahoo is better for innovation and competition,” he said.
Practically speaking, Google’s superior ability to make money off search ads might mean it effectively eliminates Yahoo as a truly independent force in search ads. But despite years and hundreds of millions of dollars spent to create and perfect a new search ad technology called Panama, which came out early last year, Yahoo’s efforts haven’t helped it regain ground lost to Google. So Yahoo’s independence in search ads may be moot anyway.
The big question now: What will Carl Icahn do? He’s into Yahoo’s stock at about $25 a share. Now, with the stock at under $23, he’s seriously underwater. He doesn’t have to sell right away, but it’s hard to see what will buoy Yahoo’s stock high enough for him to make a profit anytime soon.
Regardless of whether Yahoo is better off as part of Microsoft, or in cahoots with Google, it appears that Yahoo cofounder and CEO Jerry Yang—at least for now—has somehow managed to keep his baby independent. That’s something few people expected, even after Microsoft walked away from a deal the first time on May 3.
Not all of Yang’s Yahoo’s seem to want to stick around to see what happens next, however. Two senior executives, at least, are on the way out, according to the Times: Jeff Weiner, executive vice-president of Yahoo’s network division, which includes much of Yahoo’s major operations, including key home pages and search, is expected to work as entrepreneur-in-residence at venture firms Accel Partners and Greylock Venture. Usama Fayyad, chief data officer and executive vice president of research and strategic data solutions, and Yahoo veteran and well-read blogger Jeremy Zawodny also are leaving. They follow a steady stream of departures for the past year or more.
Here's the draft of my story to run tonight:
After more than four months of sturm und drang, the blockbuster Internet deal of the year has ended with only one inarguable winner: Google. On June 12, Microsoft and Yahoo said they ended recent talks aimed at a deal that ranged from the software giant buying Yahoo outright to purchasing the Internet pioneer’s search operations. Within hours, Google swooped in with a long-discussed, non-exclusive deal--valued by Yahoo at $800 million in annual revenue--to run the search giant’s text ads on Yahoo in the U.S. and Canada.
Despite hints before the market closed that a Google deal might finally come to pass, the sudden end of chances for a more sweeping Microsoft transaction left Yahoo investors fleeing for the exits. The company’s stock fell 10%, to $23.52. That’s still considerably above the $19.18 a share where Yahoo’s stock sat just before Microsoft made its original $45 billion bid on Feb. 1, but far below the $33 a share Microsoft offered before bowing out.
The deal caps Google’s position as the utterly dominant leader in search advertising, the most lucrative market on the Internet today. The company’s 62% share of online search queries, and an even higher share of search ad revenues, continues to grow, according to Nielsen Online. “It’s a great deal for Google,” says Shar VanBoskirk, an analyst with Forrester Research.
The announced end of the Microsoft deal also leaves Carl Icahn, the financier who launched a proxy fight in hopes of forcing Yahoo back into a deal with Microsoft, with few apparent alternatives. Icahn, who bought his Yahoo stock at an average of about $25 a share, now could lose money if he can’t come up with another plan and decides to sell. “He took the horses to the water but he couldn’t make them drink,” says Barry Genkin, who chairs the law firm Blank & Rome’s shareholder activist practice.
Genkin says it’s now unlikely shareholders will vote for Icahn’s proposed new slate of Yahoo directors ahead of Yahoo’s Aug. 1 annual meeting unless he can articulate another plan to improve Yahoo’s stock price. Absent that possibility, he favored a Google deal. But investors, who include Icahn, so far don’t seem impressed with the deal.
Yahoo’s shares rose 1% in post-market-close trading after the Google deal was announced. But later they continued falling, perhaps in part because Yahoo said the Google deal won’t result in material cost savings. Yahoo will continue to operate its own search engine and its search ad system, called Panama, both on most search queries in the U.S. and Canada and on all queries elsewhere in the world, so opportunities for cutting staff and technology spending are few.
Sandeep Aggarwal, an analyst with the financial services firm Collins Stewart, estimates the Google deal could justify only a $3 a share lift in Yahoo’s stock price, far less than the $9 a share that he reckons a larger deal to sell its search operation to Microsoft would provide. “We are a little disappointed,” he says.
Under the deal, Yahoo can run Google text ads alongside Yahoo search results, as well as on other Yahoo pages in its U.S. and Canadian Web sites. Yahoo controls when and where Google ads will run, and executives said during a conference call that Google ads would appear only on a portion of Yahoo search results. The long-struggling Internet company estimates called the deal an “$800 million revenue opportunity,” though neither Yahoo nor Google would reveal whether there are any revenue guarantees.
Yahoo also estimates that within the first year of implementing it, it will generate $250 million to $450 million in additional operating cash flow. “This puts Yahoo on a faster track to creating shareholder value,” Yahoo cofounder and CEO Jerry Yang said on a June 12 conference call. Yahoo President Sue Decker said the additional revenue should help Yahoo spend more on its other opportunities, such as its leadership position in display advertising.
However, analysts and others remain skeptical of the deal’s long-term benefit for Yahoo. “I have no idea what Yahoo’s thinking,” says Forrester’s VanBoskirk. She said the deal clearly is an attempt to appease investors demanding a higher stock price, but calls it a clear admission by Yahoo that it can no longer compete in the lucrative search advertising market. Trip Chowdhry, an analyst with Global Equities Research, is even less impressed, calling the $800 million revenue estimate “bogus.”
Google had opposed a Microsoft-Yahoo deal, but until June 12, it wasn’t clear that the search giant would step up and do a deal with Yahoo. Immediately after the outlines of a deal were revealed in April, lawmakers said they’d look at whether it might be anticompetitive, raising the likelihood that regulators could delay or quash such a deal. U.S. Sen. Herb Kohl, who chairs an antitrust committee, repeated his vow to look into the deal, though it’s unclear antitrust law will apply to what’s essentially a commercial deal.
But during an appearance in San Francisco on June 11, CEO Eric Schmidt repeated his contention that “an independent Yahoo is better for innovation and competition.” Google and Yahoo contend that the commercial deal does not require regulatory approval and said they’ve been in contact with regulators to craft an acceptable deal. Schmidt contends that it will benefit consumers with more relevant ads, advertisers with more prospective customers, and publishers with higher ad revenue.
But it’s likely that Microsoft and others will press for a stringent review anyway. The companies will hold off on implementing the deal to give the Department of Justice three and a half months to review it.
Consumer activists immediately weighed in against the deal. “Competition in the online ad sector—already weakened by a series of takeovers and acquisitions—is seriously threatened,” said Jeff Chester, executive director of the Center for Digital Democracy. “The government must take swift action to prevent the creation of a digital combine that merges assets and services of the first and second leading online search advertising companies—Google and Yahoo!.”
Advertisers may be leery too. “This is somewhat disconcerting for advertisers” who want more competition in the market, says Bryan Wiener, CEO of digital marketing agency 360i. He thinks Yahoo could suffer in the long term as advertisers abandon Yahoo search ads to go direct to Google.
Although the deal could limit Yahoo’s future growth potential, the company may not have had much choice after spending months trying to avoid Microsoft’s embrace, or at least extract a higher price for the company. Hopes for reviving a full Microsoft-Yahoo merger finally foundered on June 8, when Yahoo Chairman Roy Bostock and other board members met with Microsoft. According to Yahoo, Microsoft’s representatives said that the company was not interested in acquiring all of Yahoo even at the price range it had proffered—most recently $33 a share, according to Microsoft.
Microsoft said in a statement that it remains open to a more limited deal. But a person close to the matter say Yahoo’s board spurned a Microsoft offer to buy Yahoo’s search operation because the board believed Yahoo needed to keep that capability in-house. Microsoft was not interested in a more limited deal, this person said.
Another person said Microsoft was unwilling to make another offer for all of Yahoo, at least not at the $33 a share that Yahoo’s board members felt was the least they could accept. By the end of April, this person said, Microsoft became less enamored of a merger deal because it became apparent the deal would have to be reviewed twice—once by the current administration’s regulators and then again next year under a possible Democratic administration, which is seen likely to be less accepting of large mergers.
Schmidt said the Yahoo deal came together after months of on-and-off discussions, including between him and Yahoo cofounder and CEO JerryYang. The agreement culminated after an all-night session wrapping up the deal. Schmidt also said Google would like to do more business with Yahoo over time.
Investors may pressure Yahoo further if they don’t think the Google deal will improve Yahoo’s prospects enough to justify a higher stock price. It’s unclear what leverage they will have besides selling off more stock. Meanwhile, not all of Yang's Yahoo's are sticking around to see what happens next.
Two senior executives, at least, are on the way out, according to various news reports. Jeff Weiner, executive vice-president of Yahoo's network division, which includes much of Yahoo's major operations, including key home pages and search; and Usama Fayyad, chief data officer and executive vice president of research and strategic data solutions. They follow a steady stream of departures for the past year or more.
If Yahoo’s prospects don’t improve and the stock continues to fall, Yang and his board may find themselves once again under pressure to take further steps—even if it’s unclear what options they still have.