Issue of the week: Microsoft gives up chasing Yahoo

The long-running tussle between Microsoft and Yahoo finally ended last week, and the winner is … Google, said Michael Liedtke in the Associated Press. Microsoft, which in early May ditched its bid to buy all of Yahoo for $33 a share, or $46 billion, returned to the bargaining table in June with a new plan. It would buy Yahoo’s search business—which runs a distant second to Google’s—for $1 billion, and pay $8 billion for 16 percent of the remainder of Yahoo. But Yahoo CEO Jerry Yang rejected the proposal in favor of a deal with Google, which gives the search giant “access to a large chunk of Yahoo’s advertising space.” Google will place advertising next to Yahoo’s search results and share the revenue with Yahoo, in an arrangement that Yang says will improve Yahoo’s annual cash flow by as much as $450 million. Yang claims the deal with Google “will better position the company to capitalize on the Internet advertising market’s growth,” but it looks like “an act of desperation.” Before long, advertisers may very well “shift all their advertising to Google, because they know their messages will show up on Yahoo either way.”

Yang is trying to pull a fast one here, said Joe Nocera in The New York Times. He claims that Microsoft, not Yahoo, walked away from the table, but in truth, Yang drove Microsoft away. In May, after Microsoft raised its initial offer to $33 a share from $31, Yang held out for even more. Did he expect Microsoft to bid against itself? In June, Yang said no to Microsoft’s proposed acquisition of a minority stake. But it’s becoming increasingly clear that he has “no believable plan for turning around the company.” Shareholder activist Carl Icahn understands this. That’s why he’s threatening a campaign to oust the current board of directors and replace them with directors willing to seriously consider offers for the company. Icahn might not succeed, but I’m betting that Yang’s “days as Yahoo’s CEO are numbered.” Many of Yahoo’s long-suffering shareholders certainly hope so.

Microsoft shareholders also have reason to grumble, said The Wall Street Journal in an editorial. “Having spent years grasping for an online strategy,” Microsoft decided that it could buy a strategy by acquiring Yahoo. But then Microsoft dithered. It never launched an all-out war for Yahoo. It never enlisted the support of Yahoo shareholders, who obviously would have benefited from some kind of deal. “These aren’t the moves of a company with strategic clarity.”

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Actually, Microsoft’s shareholders should feel relieved, said Dan Burrows in SmartMoney.com. A merger with Yahoo “would likely have ended in catastrophe.” To put it bluntly, Yahoo employees hate Microsoft, and they would have quit en masse rather than work for what they call the Evil Empire. Now Microsoft can figure out an alternative plan for deploying “the

tsunami of cash created by its latest editions of Windows.” So buying Yahoo didn’t work out. “Oh, well. Back to the drawing board.”