Negative market reaction to Yahoo-Microsoft deal probably reflects reality

That Google shares fell today after the long-awaited deal between Microsoft and Yahoo was finally announced was a given -- it can't be good for Google that two of its largest competitors for the Internet search market have joined forces. But the fact that Yahoo's share price also dropped does not bode well for the future of this arrangement. The 10-year deal, under which Microsoft's new Bing search engine will power searches on Yahoo sites in exchange for a share of revenue, still must be approved by regulators in the United States and Europe, according to the Reuters international news service. Yahoo and Microsoft were motivated to reach a deal in their effort to challenge Google's dominance in the search market. Google has 65 percent of the U.S. search market versus Yahoo's 19.6 percent and Microsoft's 8.4 percent, Reuters said. Yahoo turned down Microsoft's $47.5 billion takeover offer last year. Analysts quoted by Reuters said the market was not energized by the deal because Yahoo did not receive any upfront payment as expected. "Those that were looking forward to a take-out, the deal today was rather disappointing -- it's not as good as what investors expected," said Marc Pado of Cantor Fitzerald & Co. "Overall, it's a big positive for two companies that have been struggling to keep up with Google. This consolidates their resources and allows them to make a more concerted push as the No. 2 entity," said Ross Sandler of RBC Capital Markets. Yahoo CEO Carol Bartz applauded the deal and said the lack of an upfront payment was not a deterrent because the agreement would be lucrative for her company.
While Yahoo CEO Carol Bartz had previously said that any deal would require a partner with "boatloads of money," she said on Wednesday that the revenue share agreement in the Microsoft deal was more valuable to Yahoo than a one-time payment. "Having a big up-front cash payment doesn't really help us from an operating standpoint," she said in a conference call with Microsoft CEO Steve Ballmer, Reuters said. Microsoft is expected to pay Yahoo 88 percent of search revenue from Yahoo sites for the first five years, while the companies continue to keep their advertising businesses separate. Yahoo said the deal will boost its annual operating income by $500 million and to increase cash flow by $275 million. The companies said they were hopeful the deal would close early next year, Reuters said.