How To Structure a Yahoo-Google Search Deal

Even as Carl Icahn rallies angry shareholders to try to force Yahoo (YHOO) back to the bargaining table with Microsoft (MSFT), one of the “strategic alternatives” Yahoo may still be trying to work out in the background is a search advertising deal with Google. There is a 60 to 70 percent gap between what Google collects for search ads and what Yahoo collects, so simply handing over a portion of its search advertising inventory to Google would boost its cash flow and profits considerably—perhaps adding as much as $1 billion or more in cash flow.

But how could such a deal pass muster with antitrust authorities, who are already investigating the test run Google and Yahoo did last month with only 3 percent of Yahoo’s search ads?

It would all depend on how a deal is structured.

One line of thinking is that Yahoo and Google could get away with a deal that only hands over 10 to 20 percent of Yahoo’s search advertising inventory. This would need to be on a non-exclusive basis, meaning that if somebody else could come in and beat Google’s revenue-per-search-query Yahoo would be free to hand them the ad inventory instead. The assumption was that this would be the 10 to 20 percent of keywords that bring in the highest revenues for Yahoo. (We discussed this point in our interview with Citi analyst Mark Mahaney last month, for instance).

But there is another way Yahoo could get a lot more bang for its buck in a deal with Google. Instead of handing over the most valuable search terms, it would be better off handing over the ones with the biggest delta in profitability (the difference between what Google makes on those terms and what Yahoo makes). Yahoo does not have any trouble getting decent ad rates for the most desirable search terms. Call those the head keywords that bring in the most revenues. What it has trouble making money on are the keywords in the long tail and torso of its advertising inventory. And that’s exactly where Google excels at squeezing out relevant matches and clickthroughs.

If Yahoo can identify which basket of search terms represents the biggest profitability gap compared to what Google makes, it can maximize what part of its ad inventory to outsource to Google. These terms will likely turn out to be the ones that are currently the least valuable ones to Yahoo. Picking the 10 to 20 percent of keywords where the delta is the greatest between what Yahoo and Google are able to charge would effectively multiply the impact of the deal. After all, there is no point in handing over high-revenue search terms that Yahoo is already matching Google on in terms of profitability.

If the numbers work out and antitrust can be avoided, such a deal would certainly be a way to appease (or at least answer) Yahoo’s increasingly irate shareholders. But if Yahoo is serious about striking a deal with Google, it should do so before the proxy battle with Icahn comes to a head.

Original post

Comments

[Zeninvestor]

With all due respect, if the deal you describe is not a violation of law, then then the law is worthless! This is not a serious article. Nuff said!

[marketwatchr]

What the big deal, Yahoo can't go it alone. Goog match up is not in the cards with all the lawyers involved. GOOG wants to stall things out as long as it can with promises it can't keep. Shareholders , who own the company have had it with the mis-management and the Board. Yahoo will be SOLD to the highest bidder(all or in parts)!!! Bids started at $19, now Carl is in at $24-$26.

[valleyboy]

It's interesting that Microsoft, a company found to be a monopoly, is raising antitrust objections to a Google/Yahoo deal, which would have LESS market share than Microsoft has in Windows and Office.

People fail to realize that a Microsoft/Yahoo merger is a value destroyer. If Microsoft can't buy Yahoo, it has no Plan B. Yahoo is Microsoft's Plan B (or Z, really). But if Microsoft buys Yahoo, it will still fail. It will mismanage Yahoo just like it mis-manages it's current on-line businesses. Remember, Microsoft is still losing money on it's online business. However badly you think Yahoo has mis-managed (think former CEO Terry Semel), Microsoft has done even worse !

This deal reminds me of the HP/Apollo merger. Before the merger, HP and Apollo each had 9% of the workstation market. After the merger, the combined HP-Apollo had 9% of the market.

Microsoft loses either way. It's cool to use Google. It's even cooler to hang out on Yahoo sites. It's not cool to use Microsoft anything. Outside it's monopoly businesses, Microsoft has zero customer acceptance.

[dcw]

That's OK. Microsoft has a history of "producing/destro... its competition. They will do that to YaHoo. Furthermore, they will shoot themselves in the foot in the process.

dw


On May 18 01:58 AM valleyboy wrote:

> It's interesting that Microsoft, a company found to be a monopoly,
> is raising antitrust objections to a Google/Yahoo deal, which would
> have LESS market share than Microsoft has in Windows and Office.
>
>
> People fail to realize that a Microsoft/Yahoo merger is a value destroyer.
> If Microsoft can't buy Yahoo, it has no Plan B. Yahoo is Microsoft's
> Plan B (or Z, really). But if Microsoft buys Yahoo, it will still
> fail. It will mismanage Yahoo just like it mis-manages it's current
> on-line businesses. Remember, Microsoft is still losing money on
> it's online business. However badly you think Yahoo has mis-managed
> (think former CEO Terry Semel), Microsoft has done even worse !
>
>
> This deal reminds me of the HP/Apollo merger. Before the merger,
> HP and Apollo each had 9% of the workstation market. After the merger,
> the combined HP-Apollo had 9% of the market.
>
> Microsoft loses either way. It's cool to use Google. It's even cooler
> to hang out on Yahoo sites. It's not cool to use Microsoft anything.
> Outside it's monopoly businesses, Microsoft has zero customer acceptance.