When we last left Yahoo!, Jerry Yang (CEO) and the rest of the board had just spurned Microsoft’s $44.6 billion takeover bid for the supposedly greener pastures of potential deals with AOL, News Corporation, and/or Google. The rejection of Microsoft’s bid also put the current board on a collision course with Carl Icahn in what looked to be a battle for control of Yahoo!’s board of directors.

Trials and Tribulations

After spending millions to buy 68.7 million shares of Yahoo!, Icahn was set to nominate his own slate of directors for Yahoo’s board at the company’s annual shareholder meeting. Icahn would use Yahoo! shareholders’ fury over the botched Microsoft deal to win votes for his board nominees and take over Yahoo!’s board. Yahoo! made a preemptive strike however and managed to appease Icahn by granting him three seats on Yahoo!’s board of directors in July. But what of the purported deals with AOL, News Corp, and Google?

Well, to date, the AOL and News Corp deals never materialized, at least publicly. However, Google and Yahoo! agreed to a partnership whereby Google would deliver ads on Yahoo!’s network. The kicker in the deal was that Google would pay Yahoo! more than Yahoo! could make with its own ads, meaning Google was essentially buying market share from Yahoo!.

This deal would be investigated by the U.S. Justice Department and opposed by Microsoft and online advertisers, who were arguing that the deal would be anticompetitive and result in higher ad prices. In the end, Google and Yahoo! were unable to appease Justice Department investigators by offering to cap the number of ads that would be displayed on Yahoo!’s network and Google walked away from the deal rather than fight a lengthy legal battle.

Just before Google walked away from the deal, Yahoo! reported 3rd quarter earnings. Operating income decreased 53% and revenues were virtually flat compared to the same quarter in 2007. In addition, Yahoo! announced it was laying off 1,500 employees as part of its efforts to cut costs. All told, the Microsoft bid, Icahn ordeal, and proposed Google partnership cost Yahoo! $73 million in fees for outside advisors according to a filing with the SEC.

In the wake of this double-whammy, Yahoo’s stock tumbled to around $10 per share from its 52-week high of $30.25, which it reached when Microsoft was attempting to acquire the company. Yahoo’s share of the search market also continued to decline, falling to 20% in September compared to 22.9% a year ago, according to comScore. What is Yahoo! to do? In a word, grovel.

“To this day, I believe the best thing for Microsoft to do is to buy Yahoo,” Yang said at the Web 2.0 summit in San Francisco, the Associated Press reports.


To which Microsoft CEO Steve Ballmer replied, “We made an offer, we made another offer, and it was clear that Yahoo didn’t want to sell the business to us and we moved on. We are not interested in going back and re-looking at an acquisition. I don’t know why they would be either, frankly. They turned us down at $33 a share.”

Could Ballmer be using his public comments to further drive down the value of Yahoo!’s stock before making another bid? Or is he stating his actual beliefs on the matter and only interested in “some kind of partnership around search?” Only time will tell, but it certainly seems like Microsoft is moving forward with new strategies for challenging Google.

Microsoft Moves On

Several of these strategies include new or extended partnerships. One such extended partnership is with long-standing Microsoft partner Hewlett-Packard, where Microsoft will install its Live Search toolbar on all HP computers in North America starting in January 2009.

Microsoft is also negotiating with Verizon to become the default search provider on the company’s cell phones, according to the Wall Street Journal. Though the terms of the deal are still being discussed, early indications are that the two companies would share ad revenue generated from web searches made on Verizon cell phones.

Yahoo!’s Future

What does Yahoo! do to secure its future as a viable Internet property going forward? Well, it’s changing leaders for one. In mid-November, Yahoo! announced Yang would be returning to his post as Chief Yahoo! as soon as the company found a new CEO. In addition, over the last few months, Yahoo! has rolled out a number of initiatives, releasing its own analytics package (similar to Google Analytics), updating the design of Yahoo! News, launching the APT (formerly AMP!) digital advertising platform, and announcing the Yahoo! Open Strategy, which aims to make Yahoo! programs open source.

While the change in leadership and these initiatives seem like steps in the right direction, we believe Yahoo! will need to pick a new CEO that brings fresh strategic ideas to the table and the company will need to develop significant proprietary innovations in search technology that convince users to switch back to Yahoo! for web searches. Yahoo! will probably need partners in this turnaround effort too. Microsoft is open to a partnership and combining search algorithm, mail, and instant messenger research efforts would save both companies substantial amounts of money. Such a partnership could also make Yahoo! the default search provider in Internet Explorer, Office, and other Microsoft software products and web properties. Whatever course Yahoo! chooses, hopefully it won’t be too little, too late.

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