Yahoo Inc. was in the crosshairs Friday, a day after signing a search advertising deal with Google Inc., as many investors, analysts and onetime suitor Microsoft Corp. criticized the partnership.
The agreement, hailed by Yahoo as a solution to its slumping finances, was alternately denounced as ego-driven, a threat to competition and, as one analyst put it, “one of the worst strategic maneuvers seen in the Internet industry.”
The Sunnyvale Web portal has agreed to outsource some of its search engine advertising to Google, the Mountain View Internet titan and erstwhile rival. Yahoo will continue to sell search ads, but will display Google’s ads in cases when they would generate more money - boosting Yahoo’s annual revenue by an estimated $800 million.
Many investors consider the pact a poor substitute for a sale to Microsoft, which had courted Yahoo with a $47.5 billion takeover before withdrawing the offer of $33 per share on May 3 after the two sides couldn’t agree on a price. Those shareholders now say a merger would have provided a bigger return for them, given that Yahoo’s shares closed at $23.47 on Friday, down 10 percent in the aftermath of the Google outsourcing agreement and Microsoft reiterating Thursday that it is uninterested in an acquisition.
“Some of the people involved from Yahoo should have kept their egos in check,” said a portfolio manager at an investment management firm that controls more than half a million Yahoo shares, referring to Yahoo Chief Executive Officer Jerry Yang, who he said mismanaged the merger negotiations.
The Google deal was disclosed just hours after Yang and his board rejected a proposal by Microsoft to buy Yahoo’s search business after concluding that the partnership would leave Yahoo without a key component to its future growth. The Google deal, according to a source familiar with the matter, provides more flexibility for Yahoo, as well as more revenue.
“Clearly, it is time to move on, and we believe that this agreement with Google does so by strengthening our competitiveness,” Yang said in announcing the deal.
Kevin Johnson, a Microsoft president who oversees the company’s online business, touted his company’s offer in a letter to Microsoft employees Friday. An agreement, he said, would have “provided compelling value to Yahoo and its shareholders.”
Under the offer, Microsoft would have paid $1 billion for Yahoo’s search business and entered into a long-term search advertising partnership in which they would share revenue. In addition, Microsoft would have invested $8 billion in Yahoo at $35 per share.
Johnson reiterated Microsoft’s antitrust concerns about Google, the No. 1 search engine, pairing up with Yahoo, No. 2. The Justice Department is already reviewing the deal, which won’t be implemented for at least 3 1/2 months.
“Unfortunately Yahoo has chosen a different course, and yesterday announced an agreement that would start to consolidate over 90 percent of the paid search advertising market in Google’s hands. This will make the market far less competitive,” Johnson said, predicting that the deal will face a host of legal and regulatory problems.
Several analysts were unimpressed with Yahoo’s decision to join forces with Google. In a research report, Jeetil Patel of Deutsche Bank said that Yahoo is “waving the white flag” in search advertising and, in effect, is signaling to its advertisers to simply do business with Google.
“This effectively signals the end of Yahoo’s competitive entry in the paid-search business,” Patel said.