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Microsoft should reconsider Yahoo deal
Commentary: Timing is everything when it comes to big purchases
By Therese Poletti, MarketWatch
Last Update: 12:01 AM ET Jul 21, 2009
SAN FRANCISCO (MarketWatch) -- Microsoft Corp. should really think twice before going down the road to buy Yahoo Inc.'s search business, especially if the current price tag going around Wall Street is accurate.
Late last week, AllThingsD reported that the two underdogs in Internet search, Microsoft MSFT and Yahoo YHOO, were getting close to a deal. If all goes well -- a big caveat -- a pact could be struck within the next week. See AllThingsD blog posting here.
Jeff Lindsay, an analyst with Bernstein Research, said in a note to clients Monday that, in a recent discussion with Bernstein analysts, Yahoo Chief Executive Carol Bartz said Microsoft must offer at least $5 billion upfront to satisfy Yahoo's board. Lindsay said that would make the deal worth about $6.50 a share to Yahoo shareholders.
Sure, the software goliath can easily afford $5 billion, with more than $25 billion in cash and equivalents on hand last quarter. That sum also is a lot more palatable than its hostile attempt last year to buy Yahoo outright for nearly $45 billion in cash and stock. But what would Microsoft get for that chunk of change?
This question now becomes more interesting since Microsoft has launched its own new search engine, Bing, which has gotten good reviews and is leading to some small market-share gains. According to the most recent comScore Inc. data, Microsoft saw its share grow by roughly 0.4% to 8.4%. It came at the expense of -- you guessed it -- Yahoo. See full story.
The prevailing wisdom is that by melding the search businesses of the two companies, their combined 28.4% stake of search is a much-improved position versus the 65% stake of market leader Google Inc. GOOG.
Diminished returns?
It's not really clear, though, what Yahoo brings to the Microsoft party now, except market share. Yahoo also would be guaranteed some of the revenue stream generated by its searches, but it's not clear how much or for how long. The bigger market share, of course, would be helpful in Microsoft's quest to become a bigger force among search advertisers, but it is hard to see that paying off quickly.
AllThingsD reported that Yahoo's display advertising would be a part of this new deal, and a likely scenario was Yahoo taking the lead in selling premium advertising.
It still seems that $5 billion is a big price to pay now, considering Microsoft was reportedly in previous talks to buy Yahoo's search business by itself for about $1 billion.
The companies also could face attempts by Google to stall the deal, which could end up leading to some delays and add to the cost. Many investors might remember that when Microsoft made its big hostile offer for Yahoo the last time around, Google swooped in and tried to do its own search deal with Yahoo. Antitrust regulators scuttled that deal.
Eating more share
Lindsay said he originally estimated a search deal late this year or in early 2010. It is conceivable to think that if Microsoft continues to wait at least that long, it may see more market share gains with Bing at Yahoo's expense. That could force Yahoo to accept a lower price.
This also raises the question about Bing and its impact on this on-again, off-again deal. There is an ongoing industry debate over whether Microsoft is just seeing a blip in market share because it spends $100 million on advertising. Some users will try it after they see a TV ad, and then go straight back to Google. See column on this here.
But if given a choice between Bing and Yahoo, Bing comes up with better results. I think Bing has a shot at stealing more market share from Yahoo, not necessarily Google, which is a habit that is hard to break.
If Microsoft is stupid enough to spend $5 billion on yet another search property, after spending hundreds of millions on its own development, it will undermine its own product. And if Yahoo gets $5 billion, kudos to Yahoo's Bartz, who has even more chutzpah than we even realized.
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