The trial Yahoo has been conducting to display Google ads in its search results has been judged a success, according to sources close to the companies, and Yahoo is set to move ahead on the partnership with its one-time biggest rival in an attempt to stave off Microsoft’s $42 billion takeover offer.
Yahoo’s management is not happy with the idea of a Microsoft takeover, and the Google trial has been the most audacious of several tricks the company has been pulling out of the hat, including a proposed merger with AOL. If Yahoo goes ahead with the Google partnership it could boost its cash flow by up to $1 billion a year, as Google ads net far more return than Yahoo ones per search.
The big hurdle for the deal would be the FTC and other regulatory bodies, which would take a very close look at the potential for a monopoly as between them Google and Yahoo eat up 90-percent of the contextual advertising business. It has been Google’s dominance in the market that had prompted Microsoft to make its offer to acquire Yahoo in order to combine the two company’s efforts to combat the search giant, with neither of them having much success on their own.
Such antitrust concerns could be allayed if the deal were limited to Google serving ads only to certain categories or regions. This could also limit the cash flow boost to Yahoo, but the company would still come out significantly richer in cash flow, perhaps by as much as $500 million a year.
This, alongside other measures such as the proposed merger with AOL, puts the company in a better position to demand more than the $42 billion that Microsoft is offering. There’s nothing Yahoo can do to stop Microsoft offering more, but the company can try and add as much value so that the offer becomes untenable even for the cash rich Microsoft.
The problem is that Yahoo’s management, which is opposed to the acquisition offer from Microsoft; and the shareholders – the people being offered a good deal for their shares – could come to loggerheads if management were to choose to continue a deal with Google rather than accept an enhanced offer from Microsoft.
This move by Yahoo should also raise big questions (again) as to the current management of Yahoo and the direction they have taken the firm. Yahoo has sought to keep its mantle as a “Technology and Media” company, rather than simply being an online media company; but the switch to using Google ads that would net the company an extra $500 million in cash flow shows that the company has failed in its technical efforts.
The question that remains therefore is, why didn’t Yahoo’s management give up on spending millions in fruitless R&D efforts when they could have been earning far more by making a deal with Google, spending their R&D dollars and newfound wealth developing other opportunities? Such as, for example, the AOL merger that now seems so appealing.
Yahoo’s management is being spurred to make good business decisions only now because the Microsoft wolf is at the door. This raises some questions as to whether or not the current Yahoo management team should be left in place by the firms owners, be they the shareholders or Microsoft, come what may, in the weeks to come.