Google (GOOG) got Yahoo! (YHOO) into talks about a partnership as a cruel joke. It gave the portal company hope that it can increase its revenue though a joint sales venture, then made a secret call to The Justice Department to say the arrangement was a monopoly.
It probably would not have made a huge amount of money for the world’s largest search firm. For Yahoo!, it looked like the last life boat an the ship. Once gone, it was a swim to shore, no matter how long that distance might be.
Yahoo! management had used a potential marketing marriage with Google as a way to convince its board and shareholders that it could remain independent and thumb its nose at a buyout offer from Microsoft (MSFT). The revenue yield from a Google sales pact would be that impressive.
On the way to getting the deal signed, The Department of Justice signaled that it viewed the contract as a monopoly. According to The Wall Street Journal, "The option to scrap the deal has been on the table before, but Google in particular has begun considering it more seriously as Justice Department talks haven’t progressed." Google may feel that its 65% of the search market could draw the attention of trust busters just as surely as the 85% share that the two companies would have together.
The breakdown of the arrangement may not be as bad as it seems. For shareholders who bought stock at $30 when Microsoft (MSFT) made a buyout offer, it is a disaster. It makes activist investor Carl Icahn, who forced his way onto the Yahoo! board, look like a buffoon.
At its current share price around $13, Yahoo! has a market cap of only $18 billion. It has $3 billion in cash and annual operating income of about $500 million. It also has valuable assets in Asia: pieces of Yahoo! Japan and China e-commerce company Alibaba.
While Yahoo!’s senior management may be dunderheads, they can be replaced. The company has already decided to save money by firing about 1,400 people. There may be more where that came from.
Yahoo! remains one of the largest internet properties in the world. It may only be the No.2 search company in the US by market share, but it has about 20% of the pie. There is still some money to be made there.
If Yahoo! stays independent, it may do very well coming out of a recession.
Douglas A. McIntyre
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