News

In just 24 hours, Yahoo Inc. chief executive officer Jerry Yang lost about $230-million (U.S.) after the decline in his company's stock price.

However, Mr. Yang's personal wealth could prove to be the least of his worries.

Yesterday, Wall Street pummelled Yahoo's stock after Microsoft Corp. withdrew its $47.5-billion takeover offer on the weekend. Shares dropped 15 per cent, erasing $6-billion in market capitalization and cranking the temperature on Mr. Yang's seat from hot to scorching.

The question is, what comes next for the embattled Internet trailblazer? And how fast can Mr. Yang deliver?

Yahoo finds itself staring down a series of lawsuits from disgruntled investors, employees worried about their company's future and their own declining stock options. Then there is the possibility that activist shareholders could try to resurrect the Microsoft bid later, perhaps at a lower price.

Despite the selloff, Yahoo's shares remain 30 per cent higher than the day prior to Microsoft's bid.

Investors drove shares of Yahoo up more than 50 per cent after Microsoft's offer was first announced, but now Mr. Yang and his board must find a way to prove that turning down an offer of $33 a share for a stock many analysts value at about $25 was the right move.

Analysts say that if Mr. Yang has an ace up his sleeve, now is the time to play it.

"If he [Mr. Yang] has a deal in the works with either Google [Inc.] or [Time Warner's] AOL or both, then I think things will look very promising," said Jeffrey Lindsay, Internet analyst with Sanford C. Bernstein & Co. in New York. "If it's the case that they don't and they were bluffing, the shareholder reaction will be fairly negative."

Mr. Yang's post-Microsoft options are limited and his window of opportunity to show shareholders that the company is better off without help from the Redmond, Wash.-based company is closing fast. If he stands pat, investors might lose patience with the Yahoo turnaround plan, but if he rushes into a deal with Google or the beleaguered AOL, he could regret it later.

But it was Microsoft that put a halt to the negotiations, Mr. Yang told Reuters yesterday, leaving the door open to a possible deal in the future.

"We were negotiating a way to find common ground and then on Saturday they chose to walk away," he said. "If they have anything new to say, we would be open. … I am more than willing to listen."

Asked whether he believed Microsoft's move was a negotiating tactic, Mr. Yang said he took Microsoft CEO Steve Ballmer's letter announcing the withdrawal "at face value."

Striking any kind of formal arrangement with Google would have serious implications for Yahoo, said Canaccord Adams analyst Colin Gillis. "It would boost cash flow significantly, but you're handing the search market over, even if you do it on a selective basis," he said. "Clearly, there's a ticking clock on him [Mr. Yang]."

Yahoo's best option would be to execute on the game plan it has already laid out, Mr. Gillis said. However, Mr. Gillis described Yahoo's recent execution track record as "poor."

Mr. Yang returned to the top job at Yahoo nearly 11 months ago to rebuild the company he founded in 1994. Although Yahoo has revamped its search engine, expanded its online properties and invested heavily in its mobile offerings, the company still lags Google's share of the online advertising market.

In March, Yahoo unveiled a new three-year financial plan to investors that promised to deliver net revenue growth of 25 per cent in 2009 and 2010 — up from about 12 per cent in 2007 — and increase revenue to $8.8-billion by 2010.

As the wolves of Microsoft howled at Yahoo's door, Mr. Yang and Co. sought out a number of alternative deals to fend off the takeover, including possible partnerships with AOL and News Corp.'s MySpace social networking site.

Eventually it was Google, the search engine leader and heated rival of both Microsoft and Yahoo, that offered some help.

Google and Yahoo recently ran a three-week trial that saw Google's ads appear on about 3 per cent of Yahoo's searches. Although both companies said they were encouraged by the results, any formal relationship between the two would face numerous regulatory hurdles, since a combined Yahoo-Google entity would control about 80 per cent of the U.S. online search market.

Mr. Lindsay said that in order to avoid regulatory hang-ups, the partnership would need to operate as a "search exchange," where advertisers could choose if they wanted Google or Yahoo to provide the ads and where users could decide between either one's search functions on Yahoo properties.

In search of answers

Microsoft's plan to snap up Yahoo and take a run at Google is on ice for now. That means all three are now facing some tough questions about where they go from here and what they can do to make sure that they come out on top.

• Yahoo
• Microsoft
• Google

If not Microsoft, then what?

That's the question facing Yahoo co-founder and chief executive Jerry Yang and his board now that the search engine pioneer has rebuffed Microsoft's takeover bid.

Jeffrey Lindsay, Internet analyst with Sanford C. Bernstein & Co. in New York, said that Yahoo could announce an extended partnership to outsource its search advertising to rival Google Inc. as early as this week.

"We were assuming that Yahoo had the confidence to turn down Microsoft's offer because they had something like this in the works," he said. "If it's the case that they don't and they were bluffing, the shareholder reaction will be fairly negative."

The two companies recently ran a three-week trial that saw Google's ads appear on three per cent of Yahoo's searches. Both companies have stated they were pleased with the results.

Mr. Lindsay said that in order to avoid any antitrust tie-ups, the partnership could operate as a "search exchange," where advertisers could choose if they wanted Google or Yahoo to provide the ads and that users could decide between either one's search functions on Yahoo properties.
By Matt Hartley / The Globe and Mail

Microsoft Corp. chief executive Steve Ballmer is down, but by no means out.

Although it was unsuccessful in taking control of Yahoo and grabbing a bigger share of the search engine market controlled by Google, Microsoft has a long acquisition track record, and RBC Capital Markets Corp. analyst Robert Breza doesn't expect this setback to deter the company for long.

"I would expect them to stick to their strategy and look to make acquisitions in other parts of their business," he said.

One area Microsoft may concentrate on in the near future is its software as a service business as it attempts to establish itself as a rival to Google in so-called "cloud computing."

Mr. Breza said its unlikely that Microsoft will launch a new acquisition this quarter and that although the company may take a look at Time Warner's flagging AOL business as a possible target to expand its online search business, it's not a priority.

"There's always a chance that they come back to Yahoo," Mr. Breza said. "The one thing that Yahoo offered Microsoft was instant scale ... if Yahoo stumbles in terms of their executions, which I would say is highly likely ... then I think that some of the shareholders are going to try to get Microsoft to come back to the table."
By Matt Hartley / The Globe and Mail

Google is becoming an increasingly painful thorn in the paw of the world's largest software company.

From the outset, Google was vehement in its opposition to a Yahoo-Microsoft merger. However, many analysts said that even if Microsoft had succeeded, between the time it would take to integrate Yahoo and the distractions caused by antitrust investigations the company would face from regulators, Google would still have emerged as the winner.

Colin Gillis, an analyst with Canaccord Adams in New York said that Google needs to "just keep doing what they're doing."

"The search game is over, Google is the category killer," he said. "If Yahoo outsources search to Google, under any type of agreement, even one where they are cherry-picking top paying adverts, that effectively hands the market over to Google."

Google can now look to expanding its other businesses, especially its video advertising. On Friday, the company announced it was opening up its TV ads service to all of its advertisers.

"Google will be serving on and offline ads with the same type of targeting ability, while these two are still figuring out what the next steps are," Mr. Gillis said.

Google chief executive officer Eric Schmidt recently said that one of the company's top priorities this year will be monetizing YouTube and Mr. Gillis said he also expects the search engine leader to expand its footprint in social networking in the near future.
By Matt Hartley / The Globe and Mail