Has Microsoft Found a Way to Get at Yahoo?

Latest Tack: Targeting Just Search As Media Cos. All Clamor for a Piece

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NEW YORK (AdAge.com) -- Are Yahoo's parts greater than its sum? That's the question at the heart of the company's future. And shareholders and advertisers appear at odds over the answer.

The latest in the Microhoogle saga is that every media company is hatching plans with everyone else to get a piece of the action. But however this free-for-all ends up, the one consensus is that Yahoo is unlikely to emerge looking like, well, Yahoo. Fueling the drama around the on-again, off-again deal is the fact that Yahoo's stock has fallen dangerously low -- almost to the sub-$20 levels that preceded Microsoft's takeover bid back in February -- and shareholders want action.

That kind of downward pressure, along with pressure applied by Carl Icahn, who is lobbying shareholders to elect his slate to Yahoo's board of directors at the company's Aug. 1 annual meeting, is emboldening Microsoft to again try to snatch up what it really wants: Yahoo's search business.

And if Steve Ballmer & Co. can walk off with that, he will emerge from what has been an ugly situation for Microsoft, thanks to its botched acquisition attempt and ambiguity around its digital strategy, smelling like roses. For Microsoft, nabbing just search would dramatically decrease the integration challenges sure to plague a full takeover, and it would give an immediate boost to a company that has said it wants 30% search share.

In the latest incarnation of a potential deal, as first reported by The Wall Street Journal, Microsoft is approaching potential partners about taking the display side of the company. Those reports said such a deal was unlikely.

Assume everything
When it comes to display advertising, assume everyone is talking to everyone, including Yahoo, Microsoft, Time Warner, News Corp., and even players such as Comcast and Verizon, who want to be seen as more than dumb pipes, said one party familiar with talks in the market. (Yahoo's Asia assets could also be spun off.)

Meanwhile, Yahoo has been busy making presentations to investors, insisting the combination is what makes it special. In a recent presentation to shareholders, it called Microsoft's "hybrid" deal "a bad choice for stockholders" and said: "Not owning search assets (including algorithmic search) would jeopardize the Yahoo user experience and make it difficult for Yahoo to maintain search and display volume."

"Display is built on concepts we learned from search," said Yahoo President Sue Decker, when asked by Ad Age in June whether she would do a deal to give up search. "Algorithmic search is valuable."

By algorithmic search, she means the unpaid side of search -- matching organic search results with user queries. For Yahoo, search is a data play. It believes search and display influence one another and has worked to integrate the sales force for the two channels. It also believes search can help influence the content that appears on a web page, making it more relevant. The deal Yahoo recently inked with Google involves paid search, not algorithmic search, and outsources responsibility for matching some paid search ads to user queries.

Multiple options
Advertisers seem to agree. "What is important is there's a viable No. 2 competitor in the search market and at least two platforms where you can buy search and display," said Bryan Wiener, CEO of 360i.

Jim Price, VP-media innovation at Empower MediaMarketing, said, "Without search, Yahoo becomes another display-advertising company in a world where portals are consistently losing traffic to smaller, more niche sites and ad networks." Because it's unlikely Yahoo will ever catch Google in search, he said, its display-plus-search strength is its key differentiator for advertisers.

Additionally, an analyst report from Stanford Group Co. suggested breaking up the company wouldn't yield all that much gain for shareholders. It examined the value created by a potential breakup and found that the sum of Yahoo's parts added up to $20 to $24 a share -- not much more than where Yahoo is trading.
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