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No Yippee for Yahoo on Microsoft Search Deal
Tech giants Microsoft (MSFT: 23.97*, +0.17, +0.71%) and Yahoo (YHOO: 14.29*, -0.85, -5.61%) ended a long courtship Wednesday with news of a pending a 10-year search agreement, but investors slammed Yahoo's footwork on the deal. Shares were down 11% in midday trading.
Details on the partnership will be unveiled Thursday when Microsoft holds its annual analyst day. Instead of a full merger, the companies will share search revenue, with Yahoo getting 88% of the revenue generated from its sites in the first five years of the agreement.
"In simple terms, Microsoft will now power Yahoo search while Yahoo will become the exclusive worldwide relationship sales force for both companies’ premium search advertisers," the companies said in a joint statement.
The preliminary terms of the agreement would put Microsoft's Bing search engine into Yahoo, giving the combined entity a 28% share of the U.S. search market, according to data from ComScore. It's not enough to make 70%-share owner Google (GOOG: 449.13*, +12.89, +2.95%) quake in its boots, but it raises the viability of better results in video, mobile, and online commerce, where Google dominates.
Thomas Weisel Partners analyst Christa Quarles got to the heart of investor skepticism in a note published Tuesday evening. "Combining search indexes and reorganizing a global sales force across two companies is not a trivial matter and a distraction that Google can take advantage of," she wrote. "It is unclear what the cost savings would be to Yahoo."
Allan Krans, an analyst at Technology Business Research, believes Microsoft got the better end of the deal.
"Through billions in investments, Microsoft bought and built all of the technology and data center capacity it needed to support the online marketplace that is search and advertising," but had a less than 10% share of the market, Krans wrote. "A lack of search volume is not a trivial problem; it’s the fundamental flaw that is preventing any success of positive financial return from the business."
Brigantine Advisors analyst Colin Gillis said regulator concerns and privacy laws could be an issue as the deal progresses. He also said Microsoft may be trying to kick-start a weak collaborator.
"We would be more supportive of an agreement if not for our regulatory concerns as Yahoo search is in a decline that may not reverse," he wrote Wednesday.
Collins Stewart analyst Sandeep Aggarwal said Wednesday the estimated $700 million boost to Yahoo earnings could only be considered a positive contribution, but Benchmark analyst Clayton Moran disagreed.
The absence of an upfront payment, his estimate of net annual savings of about $275 million and not getting 100% of search revenue all make Yahoo the weaker partner, he said.
"Additionally, the advertising market is not showing signs of recovery and Yahoo just re-entered a new investment phase," Aggarwal wrote.
Krans called it for Microsoft. "The deal is a clear win for Microsoft, which receives the search volume it needs, without the risk and expense of a full acquisition of Yahoo, all for a fraction of the proposed acquisition price," he wrote.
No Yippee for Yahoo on Microsoft Search Deal
Tech giants Microsoft (MSFT: 23.97*, +0.17, +0.71%) and Yahoo (YHOO: 14.29*, -0.85, -5.61%) ended a long courtship Wednesday with news of a pending a 10-year search agreement, but investors slammed Yahoo's footwork on the deal. Shares were down 11% in midday trading.
Details on the partnership will be unveiled Thursday when Microsoft holds its annual analyst day. Instead of a full merger, the companies will share search revenue, with Yahoo getting 88% of the revenue generated from its sites in the first five years of the agreement.
"In simple terms, Microsoft will now power Yahoo search while Yahoo will become the exclusive worldwide relationship sales force for both companies’ premium search advertisers," the companies said in a joint statement.
The preliminary terms of the agreement would put Microsoft's Bing search engine into Yahoo, giving the combined entity a 28% share of the U.S. search market, according to data from ComScore. It's not enough to make 70%-share owner Google (GOOG: 449.13*, +12.89, +2.95%) quake in its boots, but it raises the viability of better results in video, mobile, and online commerce, where Google dominates.
Thomas Weisel Partners analyst Christa Quarles got to the heart of investor skepticism in a note published Tuesday evening. "Combining search indexes and reorganizing a global sales force across two companies is not a trivial matter and a distraction that Google can take advantage of," she wrote. "It is unclear what the cost savings would be to Yahoo."
Allan Krans, an analyst at Technology Business Research, believes Microsoft got the better end of the deal.
"Through billions in investments, Microsoft bought and built all of the technology and data center capacity it needed to support the online marketplace that is search and advertising," but had a less than 10% share of the market, Krans wrote. "A lack of search volume is not a trivial problem; it’s the fundamental flaw that is preventing any success of positive financial return from the business."
Brigantine Advisors analyst Colin Gillis said regulator concerns and privacy laws could be an issue as the deal progresses. He also said Microsoft may be trying to kick-start a weak collaborator.
"We would be more supportive of an agreement if not for our regulatory concerns as Yahoo search is in a decline that may not reverse," he wrote Wednesday.
Collins Stewart analyst Sandeep Aggarwal said Wednesday the estimated $700 million boost to Yahoo earnings could only be considered a positive contribution, but Benchmark analyst Clayton Moran disagreed.
The absence of an upfront payment, his estimate of net annual savings of about $275 million and not getting 100% of search revenue all make Yahoo the weaker partner, he said.
"Additionally, the advertising market is not showing signs of recovery and Yahoo just re-entered a new investment phase," Aggarwal wrote.
Krans called it for Microsoft. "The deal is a clear win for Microsoft, which receives the search volume it needs, without the risk and expense of a full acquisition of Yahoo, all for a fraction of the proposed acquisition price," he wrote.
