Yahoo Sells Search Business to Microsoft

Investors Angry Over Yahoo Deal

[YHOO 14.80 0.29 (+2%) ]
[MSFT 23.975 0.205 (+0.86%) ]
[GOOG 448.72 -5.014 (-1.11%) ]

Yahoo underwent invasive surgery recently, selling its search business to Microsoft for an initial 88 percent share of search revenue in a 10-year deal.

In a lengthy interview on Friday before departing for a vacation, Carol A. Bartz, chief executive of Yahoo, said she sold the search business because Yahoo could no longer continue to match the level of investment Google and Microsoft were making in searching, one of the Web’s most lucrative and technologically complex businesses.

While reducing the marketing and infrastructure costs associated with search, the deal will also provide money that Yahoo can use to bolster other businesses. Ms. Bartz plans to invest the money in Yahoo’s display ad, content and mobile services technology.

Yahoo will lose some of its most talented engineers to Microsoft and as many as 400 employees through layoffs. The deal also undercuts years of investment around search technology.

Bartz Big Gaff

She blamed herself for a comment she made several weeks ago, at an industry conference, that Microsoft would have to pay Yahoo “boatloads of cash” to win its search business. That statement, she said, helped to solidify an expectation that Yahoo would receive $1 billion or more upfront as part of the deal.

“I made a mistake. I was never interested in doing it for upfront money. That doesn’t help me operate a business,” Ms. Bartz said. She noted that such a payment would have had significant tax consequences while contributing only $3 million in annual interest to Yahoo’s bottom line. Wall Street had become enamored with the previous, more immediately lucrative proposals between Microsoft and Yahoo. Last year, trying to improve its search business and better compete with its archrival Google, Microsoft offered $46 billion to buy all of Yahoo. Analysts estimate that the new deal — involving what many people saw as Yahoo’s most important asset — is worth only around $4 billion to $5 billion. Yahoo stocks had made a quick run up in anticipation of the deal. But, after investors hear there would be no upfront cash the stock fell 30%.

“It’s rather like getting a Picasso and saying, ‘You know, the canvas costs $200, the paint cost $300, so we’ll sell it to you for $500,’ ” said Jeffrey Lindsay, an analyst at Sanford C. Bernstein. “I’ve never seen investors so angry.”

Microsoft has the Bing Bing!

Internet data firm StatCounter said Microsoft’s
new Bing search engine had 9.41 percent of the U.S. market in July, up from 8.23 percent in June. Google’s share slipped to 77.54 percent from 78.48 percent.

They plan to use Bing to power search queries on Yahoo’s sites, with Yahoo’s sales force taking responsibility for selling premium search ads to big buyers for both companies.

StatCounter said on Monday: “Bing continues to make slow but steady progress but the combined Yahoo figures suggest that the deal announced last week will have to demonstrate major future synergies if it is to make any dent in Google’s dominance.”

StatCounter said Google’s share of the global search market slipped in July to 89.23 percent from 89.80 percent in June.

Copyright 2009 Reuters

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