Yahoo May Find Victory in Microsoft Deal's Defeat

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 (TWX) 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 (GOOG).

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.