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.
Yahoo might also seek to acquire AOL, Time Warner's Web unit, said Marianne Wolk, an analyst with Susquehanna Financial. So might Microsoft. And Google, which has a 5 percent stake in AOL, could try to enlarge its holdings in order to block a Microsoft or Yahoo takeover, Wolk said.
"We expect to see AOL emerge as the primary target in the race among the major players to reinforce and build their presence in the emerging high-growth branded ad market," Wolk said in a note to investors yesterday.
Microsoft is similarly facing questions from investors: Without Yahoo, how will the company bulk up its online business?
It could be done by acquiring other Web companies. In an interview last week, Microsoft chief executive Steve Ballmer said that few Internet companies have the size that Microsoft would need to get a quick boost for its market share in Internet advertising.
Among them, he mentioned social-networking start-up Facebook, AOL and MySpace, the social-networking service owned by News Corp.
While some analysts said Microsoft was right to walk away from the Yahoo deal because the price Yahoo was holding out for was too high, several said the tech titan must now formulate a new strategy before it falls too far behind as a Web company.
"It's hard not to be disappointed that one of the main ways to get the company to a very strong competitive stance seems to be non-negotiable," Pride said. "It's hard to say you're happy about things when the upside has been taken off the table."
Several analysts said a union of Microsoft and Yahoo might still come to pass, however.
With share prices slumping, Yahoo shareholders could force management to lower the company's asking price, allowing Ballmer to resurrect the deal.
"Microsoft may be using the crocodile strategy," said Todd Dagres, general partner at Spark Capital in Boston. "Rather than try to eat its prey while it's warm and tough, it's dragging it down to the bottom of the river, sticking it under a rock and eating it later."