ByJAMES B. STEWART
AS A YAHOO
Microsoft
Nothing in Yahoo's official statement from Chairman Roy Bostock made me feel any better. In fact, I found it insulting to any investor's intelligence, full of bromides and short on specifics. It seemed especially disingenuous for Bostock to say "we are pleased that so many of our shareholders joined us" in the view that Microsoft's bid its latest was $33 a share had undervalued Yahoo. And just who might those supportive shareholders be? No names were mentioned. No one asked me. The droves of shareholders voting with their wallets on Monday, pushing Yahoo shares down to $24 and change, a 15% decline, would suggest that there weren't all that many.
At the very least, Yahoo owes its shareholders a detailed explanation why it believes Yahoo is worth perhaps $40 a share or more. Maybe it would like to share those slides it showed Microsoft CEO Steve Ballmer in making the case that Yahoo should remain independent.
So I was hopping mad, and felt I had every right to be. I would have taken Microsoft's $33 and been happy to get it. But the more I thought about it, the more I came to believe that Yahoo may have stumbled onto the right course. My indignation has slowly drained way.
It all depends on what Yahoo does now. In my view, it has to abandon harebrained ideas like partnering with Time Warner's AOL, and face up to some hard decisions. It should admit that its own search advertising effort has failed and vigorously pursue a relationship with Google.
Yahoo made no mention of this in its statement, but clearly Google loomed large in determining the fate of the Microsoft bid. Under the pressure of the unsolicited offer, Yahoo began outsourcing some of its search advertising to Google in what apparently was a highly successful trial. This clearly weighed on Ballmer, and he specifically cited the potential relationship as a deal breaker in a weekend letter to Yang.
A Yahoo-Google search partnership would be the ultimate poison pill to Microsoft, which, should it acquire Yahoo, would never outsource a large chunk of its business to its archrival.
But there's no reason Yahoo has to keep pouring money down the drain on its faltering Panama search project. Yahoo seems to be figuring out what many have already realized: The search advertising war is over, and Google has won. Despite all its efforts, Yahoo keeps losing market share to Google. Why keep fighting when the war has been lost? Yahoo should expand the trial and outsource all of its search advertising to Google.
The benefits to Yahoo could be huge. Not only will it realize more revenue per search, but it will save all those R&D costs. For the most recent quarter, Yahoo reported "product development" costs of $306 million, or $1.2 billion annualized, of which search is believed to be the largest component by far. Coupled with higher revenues, the total annual benefit in cash flow to Yahoo should be well over $1 billion a year.
Naturally the antitrust police are already on the prowl, and you can expect Microsoft to be egging them on. But Yahoo and Google shouldn't be deterred. They'll still compete vigorously for display advertising and in other areas. It's not like they're merging. There's nothing in antitrust law that says a company has to pour money into an enterprise just to maintain the appearance of competition when someone else can do it more profitably and efficiently.
Google would also benefit from this strategy, which is no doubt one of the reasons its stock jumped on news that Microsoft was abandoning its bid. (I'm also a Google shareholder.) But this doesn't change the benefits to Yahoo. Should Yahoo announce such a strategy, I'd buy more of its shares, especially at current depressed levels. For now I'm holding the ones I have.
So where does this leave Microsoft? I admire Ballmer for being disciplined and decisive. But Microsoft's Internet strategy seems to be faltering even as its lucrative dominance of PC software is slowly rendered irrelevant by the web-based revolution in computing. In the looming showdown between Microsoft and Google, I've put my money on Google, which is where I plan to keep it.
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