Yahoo-Google Deal: Shrewd Move Or Screw Up?

When the highly anticipated Yahoo-Google paid search deal was announced on Thursday, the fallout and speculation began immediately: would it help Yahoo or was it an act of capitulation to Google? Coming as it did with the formal end of talks with Microsoft, was it a betrayal of Yahoo shareholders? Ironically, insurgent Yahoo stockholder and board critic Carl Icahn says the Google deal “might have some merit.”

It’s incredible what a soap opera all this has become. But getting down to some of the real issues, the Wall Street Journal writes about the potential for higher prices in the paid search market. This is one of the key issues in anti-trust review of the deal. Despite the fact that Yahoo CEO Jerry Yang said he doesn’t believe that regulators must approve the agreement and Google has previewed its arguments that this deal doesn’t violate anti-trust rules, the two companies are allowing regulators to approve the arrangement.

There will be plenty of concerns raised by search marketers, ad executives, and Microsoft about how this represents further consolidation in the paid search market around Google’s already dominant platform. Thus there is a chance, albeit small, that if the outcry is great enough regulators won’t allow the deal to happen. That would be something of a disaster for Yahoo and could force the company to come crawling back to Microsoft.

In contrast to others, Tim O’Reilly doesn’t believe the Google-Yahoo deal is a disaster for the industry. His argument, however, is not so much that Google isn’t dominant or that this deal doesn’t further establish that, but rather that search itself is only one way that content is discovered online. He also argues that Google doesn’t dominate mobile search. However, Google does lead in mobile search in terms of brand awareness and usage.

Silicon Alley Insider has a he said/she said analysis of the rejection of the Microsoft paid-search deal in favor of the Google option. The bottom line appears to be that the Microsoft deal offered more cash but took search completely away from Yahoo, which the company didn’t like. Yahoo CEO Jerry Yang said as much on last Thursday’s conference call. (Danny has a side-by-side chart that compares the Microsoft proposal and the Google paid search deal.)

This is a case in which the long-term strategic interests of Yahoo, the brand and entity, and the interests of shareholders may diverge. Clearly many shareholders want (or wanted) the first Microsoft acquisition deal to happen. But when it didn’t, some still would have been interested in the Microsoft search acquisition deal (i.e., any deal), which included a Yahoo stock purchase worth $8 billion on top of $1 billion to acquire the search business.

The NY Times’ Joe Nocera argues, in an article written in the style of a memo to Jerry Yang, that the Yahoo board has effectively “shafted” Yahoo shareholders by not taking the earlier Microsoft offer.

It’s very hard to resist the “only time will tell” close here. But Yahoo has laid out some very ambitious plans around AMP, YOS, and other initiatives. The departure of key executives will make achieving those plans more difficult. But if it can achieve them in some measure, the company may yet prove its highly vocal critics wrong. Still, I wouldn’t want to be in Jerry Yang’s shoes when the company holds its annual shareholder meeting on August 1 and faces some very tough questions.