Investors found a lot wrong with the deal in the search engine industry between Microsoft (MSFT) and Yahoo! (YHOO)

The smaller company’s stock dropped 12% and analysts felt that it was particularly badly served by the actions of its relatively new CEO Carol Bartz. Investors wanted Microsoft to pay upfront for the privilege of having access to Yahoo!’s 20% of the US market. Rumors were that Yahoo! would get a lump sum of $2 billion at closing, and instead, it got nothing.

The financial expectations are that Yahoo! will have a $500 million a year operating income benefit from the transaction. The portal company has been struggling for three years as Google (GOOG) has progressively taken its share of the search market away. Yahoo!’s stock has lost almost half of its value during the last five years. Google is up over 300% for the same time frame.

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The greatest asset in a merger is probably a strong and skilled person to run the integration and the integrated company when the work of putting two operations together is done. The Microsoft deal with Yahoo! does not have that. The companies did not name a chief executive of search. The people responsible for making the partnership a success are all lieutenants. Carol Bartz will spend a great deal of her time on the process, but she has a lot of trouble now just handling  Yahoo!’s portal and online display ad businesses. And, Yahoo! is the junior partner in the Microsoft deal, by far the smaller of the two companies making Bartz and unlikely candidate to supervise the marriage. Steve Ballmer runs a company that has lost much of its edge. It is still dominant in the PC operating system business, but its business and server units are being challenged by open source Linux and powerful corporations that cater to enterprise clients, especially Oracle (ORCL) and SAP (SAP). Ballmer should be in charge of the integration, but he does not have the time. He will have to manage the process with his left hand, which is already busy with his company’s game division which makes the Xbox and the company’s internet division which owns MSN.

The new Yahoo!/Microsoft business has a lot of rough sea ahead of it and no one in place to captain the ship.

Executive Producer: Philip MacDonald

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