Temptress Yahoo opts for Google

It's all ended in tears for Microsoft, after Yahoo spurned its advances and jumped into bed with Google.

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Last Updated: 31 Aug 2010

Negotiations about a possible tie-up between Microsoft and Yahoo broke down for a second time yesterday, finally bringing their long flirtation to an end. And just in case the jilted Microsoft was holding out any hope of reconciliation, Yahoo announced just hours later that they’d agreed a long-term advertising deal with its arch rival Google. Talk about sticking the knife in.

It’s the latest dramatic twist in this increasingly complicated love triangle, with Microsoft set to end up as the unlucky loser. After approaching the Yahoo board with a takeover bid back in January pitched at $31/ share (later increased to $33/ share, a price that seemed pretty rich to almost everyone except the Yahoo board), it was sent packing with a flea in its ear – at least until a shareholder revolt forced Yahoo back to the negotiating table. However, Microsoft’s ardour had clearly cooled in the interim – it seems to have gone off the idea of a takeover, and Yahoo said yesterday that it had no interest in selling its search business separately.

To make things worse for Microsoft, news emerged a few hours later that Yahoo and Google had agreed a three-year deal (which could be extended to ten if their love stays true) to display Google ads alongside Yahoo’s search results. CEO Jerry Yang thinks the convergence of search and display ads is the next big thing online – which is why he was unwilling to sell off the search business – and reckons the tie-up will bring in an extra $800m of revenue every year.

However, it will presumably also provide a sizeable boost for the market-leader Google – which is why Microsoft CEO Steve Ballmer has said that such a deal would ‘fundamentally undermine Yahoo’s own strategy and long-term viability’. So despite Yahoo’s claims that the door is still open for Microsoft, it’s hard to see Ballmer trying his luck again now – not least because Google will be due a $250m break fee if Yahoo changes hands in the next two years…

There is still a possibility that competition regulators could scupper the deal – Yahoo and Google are going to delay the start of the tie-up for three-and-a-half months to give the US Department of Justice time to give it the once-over. But it doesn’t technically need regulatory approval, so the chances are that two will soon be as one.

All of which will presumably leave Microsoft sobbing into its cornflakes this morning. Shareholders may be glad that it didn’t pay through the nose for Yahoo – but with its two biggest rivals now walking down the aisle together, it may be in danger of becoming the online equivalent of an old maid..

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