Yahoo! (YHOO) Does Not Need Microsoft (MSFT) Deal, Unless It Wants A Higher Share Price

Carol Bartz, Yahoo!’s (YHOO) new CEO, says the portal company does not need a deal to combine its search engine operations with Microsoft’s. Yahoo! has about 20% market share in the US to Redmond’s 8%.

Yahoo! may think its can stand on its own, but there is a lot of evidence to the contrary. The company’s operating profits are less than 5% of revenue. Declines in internet display advertising could keep pressure on that figure all of this year and into next.

Yahoo!’s 20% of the search market may seem impressive, but because Google (GOOG) has 65% of searches done in the US, it gets a disproportionate portion of the market’s investment in search-based advertising.

Another reason for Bartz’s comments is the new Microsoft commitment to its own search technology. It has just launched Bing, its new search engine. Development work on the project almost certainly cost tens of millions of dollars and Microsoft is investing $80 million to $100 million in marketing  the service. Those are not the actions, at least on the face of it, of a company that plans to abandon its own search engine in favor of Yahoo!’s.

The flaw in Bartz’s reasoning is that Yahoo! still trades at $16, down from the over $30 where it changed hands when Microsoft offered to buy the company more than a year ago. There is not going to be any event other than a deal with Microsoft that will double Yahoo!’s stock. It will almost certainly trade in a narrow range around $15 during the foreseeable future.

Bartz may decide to go it alone but that will almost certainly keep new shareholders out of the stock.

Douglas A. McIntyre