Microsoft to finally agree Yahoo deal

Published on Saturday 22 November 2008 13:16

MICROSOFT is finally set to tie up with Yahoo and challenge Google head on, now that the beleaguered online search and advertising firm's chief executive has announced he is stepping down.

Jerry Yang has proved the stumbling block for several months to the software giant's efforts to buy the company outright, or at least its search engine division.

Back in May, Microsoft's unsolicited $47.5bn bid to buy Yahoo was rejected by Yang, a move that infuriated some institutional shareholders.

However, as soon as Yang made his resignation announcement last week, Microsoft's chief executive Steve Ballmer reopened the door to a potential deal.

On holding fresh talks with Yahoo about a search collaboration, Ballmer told a shareholders' meeting: "We'd be very open to it." Timing of a deal will probably depend on how quickly a successor is found for Yang.

Murray Ferguson, head of sales at API Software which has offices in Glasgow and Edinburgh, said: "A link-up now seems more likely to happen, if for nothing else that Yahoo has to do something to arrest its declining share price."

Combining the two companies' search capabilities would give them a bigger share of the $10bn US internet search market. Currently, undisputed market leader Google enjoys more than 70% of that business, according to research group SearchIgnite.

The most likely link-up, according to analyst Sandeep Aggarwal at Collins Stewart, is a "sale and leaseback" deal. Yahoo would sell its search technology, patents and online traffic to Microsoft for a $1bn upfront payment plus minimum guarantees of $2.5bn annually.

Microsoft would provide search results appearing on Yahoo web pages, with Yahoo selling adverts and sharing the revenues.

Ryan Jacob, chairman of Jacob Asset Management, holding 101,874 Yahoo shares, recently said: "Microsoft and Yahoo alone would have a very difficult time fighting Google. Together, they have a better chance."

Microsoft remains in a position of financial strength but Ballmer told shareholders the world's biggest software maker was "not immune" to the tough economic climate.

The company has seen growth in all of its business groups but is now looking to cut costs, although research and development, standing at $7bn per annum, will not be reduced.

Earlier this month, Microsoft Scotland officially opened new headquarters in Edinburgh, providing a technology centre on a par to the company's head office at Redmond, on the outskirts of Seattle.

Yahoo has seen its value drop more than $30bn since it rejected Microsoft's takeover bid. But its ability to attract new clients, such as T-Mobile's decision to launch a new mobile portal powered by Yahoo, is not lost on the software company.

Meanwhile, Microsoft is having to watch its back as Google announced last week that it is planning to install its Chrome browser on personal computers, challenging Microsoft's predominant Internet Explorer browser.