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December 4, 2008

How Yahoo! Walked Away from $44.6 Billion

When we last left Yahoo!, Jerry Yang (CEO) and the rest of the board had just spurned Microsoft’s $44.6 billion takeover bid for the supposedly greener pastures of potential deals with AOL, News Corporation, and/or Google. The rejection of Microsoft’s bid also put the current board on a collision course with Carl Icahn in what looked to be a battle for control of Yahoo!’s board of directors.

Trials and Tribulations

After spending millions to buy 68.7 million shares of Yahoo!, Icahn was set to nominate his own slate of directors for Yahoo’s board at the company’s annual shareholder meeting. Icahn would use Yahoo! shareholders’ fury over the botched Microsoft deal to win votes for his board nominees and take over Yahoo!’s board. Yahoo! made a preemptive strike however and managed to appease Icahn by granting him three seats on Yahoo!’s board of directors in July. But what of the purported deals with AOL, News Corp, and Google?

Well, to date, the AOL and News Corp deals never materialized, at least publicly. However, Google and Yahoo! agreed to a partnership whereby Google would deliver ads on Yahoo!’s network. The kicker in the deal was that Google would pay Yahoo! more than Yahoo! could make with its own ads, meaning Google was essentially buying market share from Yahoo!.

This deal would be investigated by the U.S. Justice Department and opposed by Microsoft and online advertisers, who were arguing that the deal would be anticompetitive and result in higher ad prices. In the end, Google and Yahoo! were unable to appease Justice Department investigators by offering to cap the number of ads that would be displayed on Yahoo!’s network and Google walked away from the deal rather than fight a lengthy legal battle.

Just before Google walked away from the deal, Yahoo! reported 3rd quarter earnings. Operating income decreased 53% and revenues were virtually flat compared to the same quarter in 2007. In addition, Yahoo! announced it was laying off 1,500 employees as part of its efforts to cut costs. All told, the Microsoft bid, Icahn ordeal, and proposed Google partnership cost Yahoo! $73 million in fees for outside advisors according to a filing with the SEC.

In the wake of this double-whammy, Yahoo’s stock tumbled to around $10 per share from its 52-week high of $30.25, which it reached when Microsoft was attempting to acquire the company. Yahoo’s share of the search market also continued to decline, falling to 20% in September compared to 22.9% a year ago, according to comScore. What is Yahoo! to do? In a word, grovel.

“To this day, I believe the best thing for Microsoft to do is to buy Yahoo,” Yang said at the Web 2.0 summit in San Francisco, the Associated Press reports.

Still?!

To which Microsoft CEO Steve Ballmer replied, “We made an offer, we made another offer, and it was clear that Yahoo didn’t want to sell the business to us and we moved on. We are not interested in going back and re-looking at an acquisition. I don’t know why they would be either, frankly. They turned us down at $33 a share.”

Could Ballmer be using his public comments to further drive down the value of Yahoo!’s stock before making another bid? Or is he stating his actual beliefs on the matter and only interested in “some kind of partnership around search?” Only time will tell, but it certainly seems like Microsoft is moving forward with new strategies for challenging Google.

Microsoft Moves On

Several of these strategies include new or extended partnerships. One such extended partnership is with long-standing Microsoft partner Hewlett-Packard, where Microsoft will install its Live Search toolbar on all HP computers in North America starting in January 2009.

Microsoft is also negotiating with Verizon to become the default search provider on the company’s cell phones, according to the Wall Street Journal. Though the terms of the deal are still being discussed, early indications are that the two companies would share ad revenue generated from web searches made on Verizon cell phones.

Yahoo!’s Future

What does Yahoo! do to secure its future as a viable Internet property going forward?  Well, it’s changing leaders for one. In mid-November, Yahoo! announced Yang would be returning to his post as Chief Yahoo! as soon as the company found a new CEO. In addition, over the last few months, Yahoo! has rolled out a number of initiatives, releasing its own analytics package (similar to Google Analytics), updating the design of Yahoo! News, launching the APT (formerly AMP!) digital advertising platform, and announcing the Yahoo! Open Strategy, which aims to make Yahoo! programs open source.

While the change in leadership and these initiatives seem like steps in the right direction, we believe Yahoo! will need to pick a new CEO that brings fresh strategic ideas to the table and the company will need to develop significant proprietary innovations in search technology that convince users to switch back to Yahoo! for web searches. Yahoo! will probably need partners in this turnaround effort too. Microsoft is open to a partnership and combining search algorithm, mail, and instant messenger research efforts would save both companies substantial amounts of money. Such a partnership could also make Yahoo! the default search provider in Internet Explorer, Office, and other Microsoft software products and web properties. Whatever course Yahoo! chooses, hopefully it won’t be too little, too late.

About the Authors

Brian Cooper is the director of online public relations at Medium Blue, where he promotes the company’s clients on the Internet. He has a bachelor’s degree in marketing and a MBA in management from Georgia State University where he graduated summa cum laude.

Scott Buresh is the founder and CEO of Medium Blue, which was named the number one organic search engine optimization company in the world by PromotionWorld in 2006 and 2007.   Scott’s articles have appeared in numerous publications, including ZDNet, WebProNews, MarketingProfs, DarwinMag, SiteProNews, ISEDB.com, and Search Engine Guide.  He was also a contributor to The Complete Guide to Google Advertising (Atlantic, 2008) and Building Your Business with Google for Dummies (Wiley, 2004).  Medium Blue is an Atlanta search engine optimization company with local and national clients, including Boston Scientific, DS Waters, and Wake Forest University Baptist Medical Center. Visit MediumBlue.com to request a custom SEO guarantee based on your goals and your data.

5 Responses to “How Yahoo! Walked Away from $44.6 Billion

    avatar How Yahoo! Walked Away from $44.6 Billion | IsAWebmaster.com | Webmaster News and Tips says:

    […] How Yahoo! Walked Away from $44.6 Billion No comments for this entry yet… […]

    I was really kind of hoping that the deal between Yahoo and Google would go through. It may have increased ad costs on Yahoo, but it probably would have also eased pressure on Google ad prices will giving more revenue to the publishers that display the ads. Well, I guess the Justice Department thought otherwise.

    Yahoo’s future doesn’t look so great, but I agree that one of the keys to re-invigorating the brand will be a clean sweep of upper management and some new ideas at the helm.

    avatar max says:

    yahoo will never learn it. they are on a level like the credit sharks in the 1970-80. pull money now and dont care. I applied for this overture stuff some years ago. the first thing what this yahoo did was pull euro 50,- from my account. I managed to get this back, after I forgot yahoo, google adsense was $ 5,- to join. last week I sent them a e-mail to check if maybe I consider their ad stuff again, the e-mail coming back was more or less, we dont know, we are not responsible after they put 3 links I should check. I have over 100 websites, all of them are submitted to yahoo, google, MS every month. they are all at google, many with page rank 1-6, they are at MS somewhere but only about 10% of them are listed in yahoo, ect. to my opinion yahoo is a very bad manged company on a level of a kindergarten !! etc.

    avatar plat0 says:

    Yahoo!

    Give us all a break.

    It is far too clumsy ( not to mention rickety ) in all services I have used in the past ( other than email which is good enough – but no more than that ).

    For example, its absurdly intrusive and heavy handed security paranoia slows its ridiculously censored searches ( and overall navigation – especially internal ) down so much it would be laughable if it were not for the intense irritation caused to this busy ( and somewhat overworked ) researcher.

    Then we find that the quality of the results it does finally pull so typically low-grade that I have personally not only completely abondoned ( and God knows I tried ) this Titanic blunder of a company in favour of Google’s outstanding proficiency, but also spit on it’s ( hopefully imminant ) corporate grave.

    I could go on..

    But, you catch my drift I am sure.

    avatar Jordi says:

    The guys at yahoo are too arrogant to realize that they have been falling from the top of the business since a long time and will fall even deeper if they don’t do something drastic about it.
    Microsoft made them an offer they couldn’t refuse ($33 per share), but yahoo’s blind arrogance was too big at the time.
    Let’s see what Microsoft’s next move is.

    In my opinion, it is going to be good for the webmasters to have someone like microhoo :-) competing with google. Right now, there isn’t anyone.

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