10 April 2008, 15:56

Yahoo fends off Microsoft by courting Google

In the battle to defend itself from a hostile takeover, Yahoo has made its next move by pulling a deal with it's larger competitor, Google, out of its sleeve as a trump card in an attempt to prevent a possible takeover by Microsoft. Yahoo is now testing a deal with Google for online advertising. The campaign is of limited duration, but could serve as a basis for future collaboration. Yahoo has always emphasized that it would be looking into strategic alternatives to a takeover, and collaboration with Google on search engine technology, for instance, has also already been discussed; Yahoo wanted to expand its own portal, e-mail, and content services on the basis of collaboration with Google.

Microsoft did not seem pleased by the possibility of a deal between Yahoo and Google. Redmond warned that such a deal would mean that Google's share of search engine advertising would exceed 90%, basically constituting a new monopoly. Microsoft said such conditions would dramatically restrict competition. Industry and antitrust experts also believe that any deal between Google and Yahoo for online advertising would raise the eyebrows of competition authorities. In fact, Microsoft has repeatedly stressed that the takeover of Yahoo was intended to break Google's current dominance in Internet searches in online advertising. Although Microsoft has itself been found guilty of violating competition law and abusing its monopoly position both in the US and the EU, the software vendor has nonetheless tried to sell its wish to take over Yahoo as an attempt to promote competition. Microsoft reiterated this sales pitch in its comments on the deal between Yahoo and Google.

Yahoo says that the planned advertising test will run for up to two weeks on a limited part of search engine advertising at Yahoo's US site. Reportedly, no more than 3 per cent of all search queries will be included in the test. Google and Yahoo will be looking into the business potential of outsourcing more of the search-based advertising from Yahoo to Google. Google's network and technology for advertising has brought in greater revenue than competitors such as Yahoo and Microsoft have managed to generate.

But market monitors in the US say that this test does not represent a true barrier for a takeover of Yahoo by Microsoft. There is, however, general agreement that it will increase the pressure on Microsoft and show Yahoo shareholders that the company does indeed have alternatives to a takeover. An executive from Yahoo's second-largest institutional investor recently criticized Microsoft's takeover bid, saying it was too low.

On the weekend, Microsoft made an ultimatum: if no agreement can be reached in the next three weeks, Microsoft will attempt a hostile takeover. If negotiations fail, Microsoft plans to make offers directly to Yahoo shareholders. In that case, the takeover bid could fall short of the almost $45 billion already offered. Yahoo initially reacted by saying it was willing to enter into negotiations, but that it still feels that the original takeover bid is too low. Yahoo's CEO Jerry Yang also said that his company's board of directors is convinced that the bid is not in the best interest of the company or its shareholders.

After Yahoo and Google announced their surprising new plans and Microsoft voiced its initial harsh criticism, the software vendor said it is taking a close look at all of its options. Microsoft is sticking to its argument that its takeover bid is the only alternative that offers Yahoo shareholders the full value of their investment, gives stakeholders input into the future of the firm, and improves choice for content providers, advertisers, and consumers.

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(trk)

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