Failed Yahoo Talks Leave Google on Top

By Peter Whoriskey
Washington Post Staff Writer
Tuesday, May 6, 2008

So who emerged the winner after the three-month standoff between Microsoft and Yahoo? Maybe neither.

Instead, it was Google, their chief rival and the dominant player in Internet advertising, that appeared stronger after Microsoft's bid to buy Yahoo unraveled over the weekend, according to analysts and the judgment of Wall Street.

The Mountain View, Calif., company already had taken a commanding lead in search advertising, the largest single chunk in the $21 billion online advertising market in the United States, according to the Interactive Advertising Bureau.

Microsoft, and many advertisers, had hoped that with Yahoo it might form a credible competitor to Google. But with the abandonment of the Microsoft-Yahoo negotiations on Saturday, it is unclear what strategy either has for gaining on the front-runner, leaving Google its dominant role in shaping the burgeoning Web business.

At the close of markets yesterday, Yahoo stock had fallen precipitously -- down 15 percent, to $24.37. Microsoft shares dipped slightly, down 0.5 percent, to $29.08. Google rose 2.3 percent, to $594.90.

"In the end, Google is the clear winner from the failed Microsoft bid to buy Yahoo!" Brian Bolan, director of research for Jackson Securities, wrote to investors yesterday. "They retain their lead against the number two and three competitors and continue to make them fight for the scraps that they do not want. Due to their immense size and control of the Internet search ad markets, we see the potential for increased Google earning due to this outcome."

Whether any company can catch Google in the race for online advertising -- and a preeminent position in shaping the economics of Web content -- is a question that now absorbs many businesses in the Internet realm.

In rejecting Microsoft's offer of $33 a share, Yahoo co-founder and chief executive Jerry Yang must brace for what is likely to be enormous pressure from shareholders. With Yahoo shares closing yesterday at $24.37, investors now know they might have been able to get $33 for them.

"Shareholders have to be sitting back and thinking. 'So you backed me out of $33 a share? Now you better give me something better,' " said Jason Pride, director of research for Haverford Investments, which has 5.8 million shares of Microsoft stock.

To pacify them, Yahoo will probably seize any opportunities to enhance its business, analysts said.

Yahoo could continue to pursue a deal with Google in which Google would provide the advertising that accompanies Yahoo's search results. Such a deal would immediately increase Yahoo's ad revenue.

But it could compromise the company's independence, analysts said. And any such deal would be likely to draw scrutiny from antitrust regulators, as it would unite Google and its distant-second competitor in search advertising.

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