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How Yahoo! Walked Away from $44.6 Billion
By Brian Cooper and Scott Buresh (c) 2008

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.

© Medium Blue 2008
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Scott Buresh is the CEO of Medium Blue Search Engine Marketing,
which was named the number one organic search engine optimization
company (http://www.mediumblue.com/)in the world in 2006 and 2007
by PromotionWorld. Scott has contributed content to many
publications including The Complete Guide to Google Advertising
(Atlantic, 2008) and Building Your Business with Google For
Dummies (Wiley, 2004), MarketingProfs, ZDNet, WebProNews,
DarwinMag, SiteProNews, ISEDB.com, and Search Engine Guide.
Medium Blue serves 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 (http://www.mediumblue.com/seo-guarantee.html) based
on your goals and your data.
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