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ANALYSIS
By Eve Tahmincioglu
MSNBC contributor
 
Eve Tahmincioglu

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The verb  “googling” has become synonymous with Internet searches, a fact that speaks to Google’s dominance. But don’t expect the verb “msn-yahooing” to become part of the lexicon anytime soon.

Even with the $44.6 billion bid by Microsoft Corp. to buy Yahoo Inc., the combined company would be unable to knock Google Inc. off its web search and web advertising throne, industry watchers say.

“It’s going to be awfully hard to take two complex companies that are trailing, put them together to beat a company that has the tremendous momentum of Google,” says Bob Monroe, associate teaching professor in information technology and computer science at the Tepper School of Business at Carnegie Mellon in Pittsburgh, PA.

Indeed, even a merged Microsoft and Yahoo would still be dwarfed by Google. The web giant holds nearly 60 percent of the Internet search market share, compared to what would be a 33 percent stake for the combined Microsoft-Yahoo.

But the deal would go a long way in helping the two companies in their battle for the lucrative Internet advertising space that is expected to explode in the next decade. “I think this deal is a no brainer,” says Rich Munarriz, senior analyst of media and technology at The Motley Fool. They need to marry, he explains, because alone they would be unable to at least give Google a run for its money.

“Even with Yahoo on Microsoft’s shoulders, the company would still come up to Google’s belly button,” he quips.

While the deal makes sense to many technology analysts, most agree there will be challenges.

First off, is the issue of combining two very different cultures. Yahoo is seen by many as more cutting-edge and creative, compared to Microsoft’s more business-like image. Bringing together two very different workforces will be a challenge, says Andy Zaleta, a partner in the technology practice at recruiting firm Battalia Winston.

Employees at firms that are acquired – in this case Yahoo – are typically the ones whose jobs are most threatened, Zaleta says. But, he points out, Microsoft has already reached out to software developers at Yahoo, offering them retention packages if the deal goes through.

So that means, upper level management and those outside of the engineering sphere, he adds, may have the most to lose if such a deal goes through.

  More on Microsoft’s Yahoo bid
Microsoft makes hostile bid for Yahoo
Why Google will remain king of search
What happens if Microsoft acquires Yahoo?
AOL may get left out in Microsoft-Yahoo
Newsweek: Is this the end of Web 2.0?
Newsweek: Is Microsoft paying too much?
Economy eats away at Google profits
Vote: Can Microsoft-Yahoo beat Google?
  Discuss your view of Microsoft’s offer
Full text: Ballmer’s letter to Yahoo’s board
  Video: Handicapping likelihood of the deal
 
 
 

As far as regulatory hurdles, most analysts believe the deal will have little problem getting past a U.S. Justice Department review because even merged the company would be no where near the size of Google in the Internet search space.

But in Europe, the battle may be harder to win.

It’s hard to predict exactly what the European Community will do, but Jonathan Yarmis, an analyst with AMR Research, says it will all come down to “who the EC hates more: Microsoft or Google.”

“They hate anything that strengthens Microsoft but there is also growing concern over anything that strengthens Google,” he notes.

Microsoft shareholders might not be that happy with the prospect either.

Anant Sundaram, finance professor at the Tuck School of Business at Dartmouth in Hanover, N.H., says, “This is a great deal for Yahoo’s shareholders, but an iffy one for Microsoft’s shareholders.”

“The $31 per share offer by Microsoft for Yahoo, for a total valuation of $44.6 billion, seems like a substantial overpayment,” he explains. “While this valuation presumes revenue synergies from increased advertising and moves into newer areas such as video and mobile, as well as cost synergies from R and D efficiencies and other cost reductions, the 62 percent premium over yesterday’s closing sets tough synergy goals to achieve.”

A tough economy will only make matters worse, he adds.

But Motley Fool’s Munarriz says it’s a move Microsoft had to make if the company was going to get in the Internet search and ad game with Google.

“You can’t compete with something like a Google but you can hold off the bleeding,” he explains. “Buying Yahoo is like a tourniquet for Microsoft.”

The big surprise, Munarriz surmises, is if Yahoo says no to the offer.

There is no other publicly traded company that can afford the deal that Microsoft has put on the table, he says. While Google could make a bid for Yahoo, he adds, no regulator would ever go for such a combination because it would surely hinder competition in the search arena.

While all these Internet portals want people surfing the web to do searches on their websites, thus capturing the coveted eyeballs, the real money is in the advertising dollars businesses spend with Google, Microsoft and Yahoo in order to get to those eyeballs.

 The battle for search
 
How the businesses of Microsoft, Yahoo and Google stack up
• Microsoft
• Yahoo
• Google
 
 
 
Microsoft
Total profit in fiscal 2007: $14.07 billion
Total revenue: $51.12 billion
Headquarters: Redmond, Wash.
Employees: 83,945
Business breakdown (and most recent quarterly revenue): Online, including ads ($863 million); Windows operating system ($4.34 billion); server software and tools ($3.28 billion); business software, including the Office productivity suite ($4.81 billion).
Source: AP research, Microsoft, Yahoo, Google • Print this
 

Google is clearly the leader in this regard. “Most people start their day out on the web by going to Google,” says Carnegie Mellon’s Monroe. Neither Yahoo nor Microsoft, he adds, “offers software or services that are significantly more compelling than Google.”

AMR’s Yarmis disagrees. He believes Microsoft has some decent technology that enables them to monetize traffic, but the problem is the software company just doesn’t have enough search traffic.

Outside of search, though, Google hasn’t been nearly as dominate.

Google’s web mail, for example, is still in beta and hasn’t been the mail powerhouse some analysts expected. Yahoo’s and Microsoft’s service, however, have done much better, Monroe says.

So if Microsoft and Yahoo can get it together and create a viable alternative to Google, companies that pay ad revenues to Google now may reap the benefits down the line when it comes to choice. “Advertisers are scared of Google’s growing power,” notes Yarmis.

By BRIAN BERGSTEIN, AP Technology Writer

BOSTON - A combination of Microsoft and Yahoo could reshape the Internet landscape for millions of Web users: Would the two companies join their online portals? Could they rethink the desktop computer to integrate Web content more directly?

The changes are potentially huge, but probably not in the short term.

Microsoft executives did not indicate Friday exactly what they would do with Yahoo’s brand if their bid, now valued at $42 billion, is accepted. But analysts expect the combined companies to preserve many of their separate free services, like instant-messaging and e-mail programs.

A more likely medium-term change is that some of Microsoft’s Web content could fade away or get added to Yahoo, which has a vast collection of news and features aggregated from other providers.

Microsoft’s Web properties, including its Yahoo-like MSN portal, aren’t exactly slouches: They rank third, trailing only Yahoo and Google, in total visitors. But while Yahoo still is profitable, Microsoft’s online services are a consistent money loser. The MSN search engine is a laggard, even with recent efforts to soup it up under Microsoft’s online umbrella it calls “Live.”

Having Yahoo in its tent could give Microsoft a rationalization for abandoning its unprofitable online elements.

“I think MSN folds into Yahoo,” said Ian Campbell, CEO of Nucleus Research. “It would be foolish to keep that separate.”

Perhaps the biggest change Microsoft and Yahoo could achieve together would be creating a better way to combine the Web and desktop computing — not to mention cell phones, TVs, cars and any other gadgets that might someday plug into the Internet.

Consumers who access the Web on cell phones and handheld computers might be the first to find something new as a result of a Microsoft-Yahoo combination. Devices that run Microsoft’s Windows Mobile operating system could be better integrated with Yahoo content and possibly yield new services, like social networking functions.

New ideas will be key to compete with Google’s Web presence. After all, people don’t “Microsoft” or “Yahoo” anything. Microsoft in particular tends to be tolerated more than loved. Google is also leading development of an alternative cell-phone operating system it calls Android.

Eventually, a teamed-up Yahoo and Microsoft might be able to rethink the PC desktop — where Windows still runs 90 percent of the world’s PCs — so that Internet data such as stock prices, sports scores and weather are automatically baked in.

“We all have our home page because we have a concept of a home page,” Campbell said. Before long, “we may not have a home page — it might just be the background of my desktop. There’s no reason why Microsoft can’t push this another level.”

Microsoft might also use Yahoo’s online strengths to galvanize Web-based versions of some of its powerful desktop software applications, like Word and Excel.

Open-source rivals and Google are threatening to bite into Microsoft’s lucrative Office software franchise with free versions of those kinds of “productivity” software. Microsoft is developing Web-based versions of its own, but slowly.

Now Yahoo could be the face through which Microsoft offers those online applications. Perhaps one day a Microsoft-fueled package of “Yahoo Apps” will go up against “Google Apps.”

Even with these possibilities, analyst David Mitchell Smith, a vice president at Gartner Inc., believes the biggest change from a Microsoft-Yahoo deal probably will be the one most Web surfers don’t notice. That will come as the companies try to broaden their ability to deliver ads all over the Internet, wherever it reaches.

It’s necessary because being the most popular online destination — as Yahoo already is — is no longer enough. The explosion of blogs, video sites and other user-generated content has made our Internet travels more wide-ranging. As a result, the biggest Internet companies now need their ad networks to reach far beyond their home portals. Google has mastered that. Microsoft and Yahoo have not.

“I think that’s really what it’s all about,” Smith said. “It’s about advertising. It’s about search.”

(This version CORRECTS value of bid to billion sted million; CLARIFIES that deal is now worth 42, not 45, billion.)

By MICHAEL LIEDTKE, AP Business Writer

SAN FRANCISCO - Unable to topple Google Inc. on its own, Microsoft Corp. is trying to force crippled rival Yahoo Inc. into a shotgun marriage, with a wager worth nearly $42 billion that the two companies together will have a better chance of tackling the Internet search leader.
 
Microsoft’s audacious attempt to buy Yahoo, spelled out in an unsolicited offer announced Friday, shows just how much Google threatens the world’s largest software maker’s grip on how people interact with computers.

For Yahoo, the bid represents another painful reminder of how missed opportunities and mismanagement combined to open the door for Google to supplant it as the Internet’s main gateway, decimating its stock price in the process.

Redmond, Wash.-based Microsoft is trying to avoid a similar fate at Google’s hands as more people access services and computer programs online instead of relying on packaged software applications.

Although Microsoft remains the world’s most valuable technology company, its position will become more precarious unless it can cultivate a more loyal Internet audience and generate more online ad revenue to subsidize the free services taken for granted on the Internet.

Microsoft is acutely aware of the upheaval that can be caused by a pivotal shift in technology, having been the biggest beneficiary during the 1980s and 1990s of a transition from mainframe computers to personal computers that knocked IBM Corp. off its pedestal.

“Microsoft has to do this deal. It’s a battle that Microsoft needs to win,” said AMR Research analyst Jonathan Yarmis.

But there’s no guarantee that Yahoo will be willing to sell to Microsoft — or that the deal will win the necessary approvals from antitrust regulators in the United States and Europe if Yahoo capitulates.

Sunnyvale-based Yahoo had little to say Friday beyond a terse statement assuring its shareholders that its board will “carefully and promptly” study the bid.

In a conference call Friday, Microsoft Chief Executive Steve Ballmer indicated he won’t take no for an answer after Yahoo rebuffed takeover overtures a year ago.

“This is a decision we have — and I have — thought long and hard about,” Ballmer said. “We are confident it’s the right path for Microsoft and Yahoo.”

Yahoo will likely face intense pressure to accept, given its steadily sliding profits and a murky 2008 outlook that caused its stock price to drop to a four-year low earlier this week.

Microsoft’s $31-per-share offer — originally valued at $44.6 billion — represented a 62 percent premium to Yahoo’s closing price late Thursday, although it’s below Yahoo’s 52-week high of $34.08 reached less than four months ago. On Friday, the total value of the cash-and-stock deal fell to $41.7 billion, or $28.95 per share, because Microsoft’s shares declined on the news.

Yahoo shares soared to a split-adjusted high of $118.75 in 2000 before the dot-com bust. That peak coincidentally also was just before Yahoo gave Google its first big break by hiring it to run its search engine.

Search engines are crucial tools because they have become a central hub in hugely profitable ad networks.

Advertisers around the world are expected to double their spending on the Internet during the next three years as more people get their news and entertainment on the Web instead of television, radio, newspapers and magazines. The trend is expected to create an $80 billion online ad market in 2010, up from an estimated $40 billion last year.

After realizing how much money Google was making from search, Yahoo introduced its own technology in 2004, but by then it was too little, too late.

Forrester Research analyst Charlene Li expects Yahoo to resist, predicting the company “will do everything possible to stay independent,” even if it means swallowing its pride and rehiring Google to run its search engine and sell ads on its site.

Other analysts still think Yahoo might try to line up a white knight rather than fall into Microsoft’s clutches. Analysts mentioned several other potential suitors, including News Corp. and InterActiveCorp.

Dinosaur Securities analyst David Garrity even thinks it’s possible that China’s search leader, Baidu.com Inc., or Chinese e-commerce conglomerate Alibaba.com Inc. might bid for Yahoo. Alibaba.com is 40 percent owned by Yahoo.

In what most analysts regard as a long shot, there was even some chatter that longtime Microsoft rival Apple Inc. and its CEO, Steve Jobs, might come to Yahoo’s rescue.

If push comes to shove, most analysts believe Microsoft will raise its cash-and-stock bid.

Investors appear confident an agreement eventually will be reached. Yahoo shares climbed $9.20, or nearly 48 percent, to $28.38 while Microsoft shares fell $2.15, or 6.6 percent, to $30.45 — a sign that Wall Street is skeptical about whether the acquisition makes sense.

“It’s a classic case of a buyer overbidding to blow any potential competitors out of the water,” said James Owers, a Georgia State University professor of corporate finance.

Shortly after Microsoft disclosed its intentions, the U.S. Justice Department said it is “interested” in reviewing antitrust issues. European Union officials declined to comment, but analysts said Microsoft probably will face more challenges getting a Yahoo acquisition approved in Europe than the United States.

Microsoft made its offer a few hours after Yahoo’s chairman, Terry Semel, stepped down, removing a potential stumbling block. Semel had rejected Microsoft’s takeover overtures a year ago while he was still Yahoo’s chief executive, according to a letter released Friday.

Yahoo co-founder Jerry Yang replaced Semel as CEO nearly eight months ago while another Yahoo director, Roy Bostock, is now chairman.

Yang, a billionaire who is one of Yahoo’s largest shareholders, isn’t believed to have warm and fuzzy feelings about Microsoft. He has openly expressed his admiration for Jobs and last year even invited the Apple CEO to Yahoo’s headquarters for a pep talk with employees.

Microsoft believes its technological expertise will be a good fit with Yahoo’s knack for providing content and services that keep people coming back to its site. Combined, the two companies would reach a U.S. online audience of 142 million compared with 124 million for Google, according to Nielsen Online.

But Yahoo and Microsoft are so far behind Google in the lucrative search market that they still will have a lot of ground to make up even if they joined forces.

Google already controls 62 percent of the worldwide search market, and has been widening its lead, according to the latest data from comScore Media Metrix. By combining, Microsoft and Yahoo would have a 16 percent share of the worldwide search market, the Web traffic tracking company said.

Google shares fell $48.40, or 8.6 percent, to close at $515.90 Friday, but the downturn appeared to be driven more by a disappointing fourth-quarter earnings report than by Microsoft’s bid for Yahoo.

Besides helping to boost its online ad revenue, Microsoft believes it could mine more profit from Yahoo by jettisoning workers and eliminating overlapping operations.

Microsoft said it sees at least $1 billion in cost savings if it buys Yahoo. Microsoft executives deflected questions about how many jobs might be lost, but the company emphasized retention packages will be offered to Yahoo engineers and other key employees, including some executives.

The fate of Yahoo’s brand also is unclear if Microsoft takes over. Both Ballmer and Kevin Johnson, president of Microsoft’s platforms and services division, hailed Yahoo’s strong brand value but did not commit to keeping the name alive.

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AP Business Writer Jennifer Malloy in New York and AP Business Writer Jessica Mintz in Seattle contributed to this story.

Google Earnings Beat Estimates—Again

The search megalith reported stellar third-quarter earnings, though it warned that margins may thin as it makes needed investments.
The Google stand at the Frankfurt Book Fair, Oct. 10, 2007 Getty

As a company that regularly beats Wall Street’s earnings estimates, Google needed to blow away expectations on Oct. 18 to impress investors who have propelled the stock to record highs in recent days in anticipation of yet another blockbuster quarterly announcement. Anything less and investors would sell off the stock as they had in past quarters when Google just met or narrowly exceeded analysts’ projections.

Google (GOOG) did not disappoint. The search-advertising Goliath said third-quarter net revenue rose 61%, to $3.01 billion, a number that takes into account the amount Google pays Web site owners to put ads on their pages. That soundly beat analysts’ average estimate for sales of $2.9 billion. Not counting the amount of stock awarded to employees, earnings per share rose to $3.91, beating forecasts of $3.78 a share. “We had a very strong quarter across the board,” said Chief Financial Officer George Reyes.
Online Ad Dominance Assured

Wall Street assumed that Google’s revenues, minus traffic-acquisition costs, would grow about 57% from the prior year. They also assumed that Google could hit that number despite an anticipated credit-crunch-related slowdown in financial-services advertising, one of the largest Web marketing categories. “When you have a company that has performed as consistently as they have to the upside, there is an inherent expectation that gets built into performance,” says Derek Brown, an Internet analyst at Cantor Fitzgerald. “They are larger, growing faster, and are more profitable than any company in the Internet sector by a wide margin.”

Google owes its growth mainly to its dominant share of the online advertising market. Google captures roughly 32% of the $21.4 billion in U.S. advertising spending, according to an Oct. 16 report by research firm eMarketer. Google is especially adept at search advertising, which comprises more than 40% of the U.S. online advertising market.

Now Google is racing to gain a larger slice of other forms of online advertising, including display advertising, the term given to ads that run in a fixed spot on a Web page. That’s why Google agreed to acquire ad network DoubleClick for $3.1 billion (BusinessWeek.com, 9/28/07) earlier this year.
New Ad Forays Won’t Come Cheap

Google is also taking steps to get into video advertising, a segment that eMarketer estimates could comprise more than 13% of the online advertising market in four years, up from 8.2% this year. In August, Google announced plans to embed ads in YouTube videos. “We have a really nice ad that shows up in the bottom half of the video,” Google co-founder Sergey Brin said during the analyst call.

Google’s forays into other advertising arenas are still early, and its success is by no means guaranteed. A deal that lets Google place ads on News Corp.’s (NWS) social network, MySpace, is going well, according to Google, but it’s still not a resounding success. “It is obviously a challenge because there is so much inventory and people can be distracted by many different things,” Google co-founder Larry Page said on the conference call. “So there are a lot of things that make it hard.”

One thing that makes it difficult to carve a slice of new areas of advertising is the cost. Google executives have pledged that they will continue to spend money on the infrastructure improvements and the personnel necessary to innovate around new ad formats. During the earnings call, CFO Reyes cautioned analysts that such investment could take a toll. “Margins may decline as we continue to invest in our business,” said Reyes.
Analysts Worry About Spending

Despite the blockbuster quarter, analysts expressed some concern that Google may be investing too much, too quickly. During the call, several analysts posed pointed questions about Google’s decision to hire an additional 2,100 employees during the quarter. Google blamed a less-than-amazing performance last July in part on hiring more aggressively than it had initially planned (BusinessWeek.com, 7/20/07). Chief Executive Eric Schmidt tried to allay concerns, saying, “this is an area where we need to spend more time and focus on what is the appropriate rate…We are paying a lot of attention to head count.”

But for now, it’s hard for even cautious analysts to be negative about Google’s numbers.