Tuesday, May 6, 2008

yahoo bid microsoft Deal collapse

Yahoo bid Microsoft Deal's collapse good news for Google

Microsoft needs to rethink its strategy now that it has backed away from its $47.5 billion proposal to acquire Yahoo. Yahoo needs to show Wall Street that it is better off on its own.

Google, on the other hand, appears to have come out on top of the tussle.

The Internet giant has beaten back the biggest threat to its online advertising business, a combination of its No. 2 and No. 3 competitors. It remains No. 1 in online search and search advertising. And it may even emerge with a new advertising partnership with Yahoo.

"There was no outcome that would hurt Google," said Shar VanBoskirk, principal analyst with Forrester Research. "This outcome is good news for them. Now they have a deflated Microsoft and a repositioning Yahoo, and they're still as strong as they were before."

On Monday, Google shares climbed more than 2 percent, or $13.61 per share, to $594.90 per share.

A spokesman for Google declined to comment. But early on, Google made clear its perspective on Microsoft's unsolicited bid: "Microsoft's hostile bid for Yahoo raises troubling questions," said David Drummond, Google's chief legal officer in a blog.

And, in the end, Google came through as the spoiler of Microsoft's ambitious unsolicited bid. Last month, Google tested a potential advertising partnership with Yahoo, with Yahoo outsourcing its search advertising business to Google. That, in turn, became one of the key reasons for Microsoft's retreat.

In Microsoft CEO Steve Ballmer's letter to Yahoo announcing the dropping of the bid, Ballmer said that the possibility of Yahoo and Google going ahead with such a partnership was a particular concern.

Among the issues, Ballmer said he felt Yahoo's agreement with Google could undermine Yahoo's advertising business, raise regulatory concerns, spur Yahoo engineers to leave the company and give Google too much control over prices.

"Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo undesirable as an acquisition for Microsoft," Ballmer said.

The future of the Yahoo and Google partnership isn't clear, now that Microsoft has withdrawn its bid. But in the end, experts said, Microsoft became a catalyst for Yahoo even to consider such a deal.

Google has been striking similar advertising agreements with other sites, such as MySpace and - though some also believe such a deal was just as helpful to Yahoo to fend off Microsoft - stood to benefit from making similar arrangements with Yahoo. "They've probably been lobbying for this for years," said David Liu, co-head of the Internet and digital media group at Jefferies & Co.

The only downside for Google? That the Microsoft-Yahoo battle didn't draw out longer.

If Microsoft had proceeded with a hostile takeover bid, as many had expected, the move would have distracted Google's top two rivals for some time, allowing Google to pull ahead even more. It would also give Google time to digest its recent acquisition of online advertising company DoubleClick.

Instead, now Yahoo and Microsoft have something to prove, and will likely soon start trying to demonstrate that they're capable of competing against Google.

"That's going to be more of an acute challenge to Google," said Andrew Frank, a research vice president with Gartner.

Google dominates the online advertising business with more than 57 percent of the market, according to eMarketer, followed by Yahoo, Microsoft and AOL. EMarketer estimates that marketers will spend some $25.9 billion this year in online advertising.

"It's great news for Google," said Randy Skoglund, executive director of Americans for Technology Leadership, a Washington, D.C., group of technology professionals. "A Yahoo-Microsoft combination could have emerged as real competition for Google. This ensures they don't have a real competitor in the market."

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