SEATTLE – Without Google’s muscle behind it, Yahoo’s chances for digging out of a long slump are looking even poorer, making it appear more likely that the company will turn to Microsoft or AOL to help weather the economic downturn.
Yahoo Inc., which runs the No. 2 search engine, agreed in June to let No. 1 Google Inc. sell some of the ads shown next to Yahoo’s search results. The deal was intended as a lifeline for the struggling Internet pioneer after it spurned Microsoft’s rich $47.5 billion takeover bid less than a month before.
Now that Google has scrapped the Yahoo partnership rather than challenge the Justice Department over its antitrust objections to the deal, Yahoo is back where it began the year, scrambling to engineer a turnaround under a management team on shaky ground with shareholders.
Except now, the climate is much worse. The crumbling economy is discouraging advertisers from spending online, particularly on the billboard-style display ads that are Yahoo’s bread and butter. Sunnyvale, Calif.-based Yahoo, already adjusting, announced it would lay off 10 percent of its work force after profits plunged 64 percent in the most recent quarter.
Yahoo Chief Executive Officer Jerry Yang may have wrung the last drops of shareholder goodwill by betting on a Google deal instead of taking Microsoft’s offer. To avoid getting pushed out by Yahoo’s board, which now includes activist investor Carl Icahn, Yang is under intense pressure to boost the company’s bottom line.
In an appearance Wednesday night, Yang said Microsoft Corp. would be wise to make another bid for his company, though he didn’t suggest a price. Yang turned down Microsoft’s offer of $33 a share in the spring, and now finds Yahoo trading around $13.
“To this day, I believe the best thing for Microsoft to do is to buy Yahoo,” Yang said Wednesday.
Barring that, his list of options is limited, and the most obvious moves have been on the table for months.
Imran Khan, an analyst for JP Morgan, said he believes it would make sense for Yahoo to sell its search operations to Microsoft – an idea that Microsoft proposed this spring but Yahoo rejected.
The result would be cost savings for Yahoo and more energy to focus on the display ad business. Khan estimates $1.4 billion in cost savings or, after factoring out $694 million in lost annual revenue, a net gain of $725 million. Yahoo could use the cash to buy back stock, make smart acquisitions and “more strategic, targeted head count reductions,” Khan argues.
“We think continued investment in search, at the expense of display investment, has given competitors the opportunity to bite into Yahoo’s leading display ad market share,” Khan wrote in a recent research note.
Yahoo shareholders are still interested in some sort of Microsoft deal, and despite Microsoft’s current stance that it doesn’t need Yahoo to challenge Mountain View, Calif.-based Google, many industry watchers think the software maker is still interested, to a point.
Matt Rosoff, an analyst for the independent research group Directions on Microsoft, said he can’t see Microsoft buying all of Yahoo, for the same reasons talks fell apart in the first place: Microsoft was hoping for a quick and painless integration, but Yahoo resisted.