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At Yahoo: New CEO

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CEO Carol Bartz has said she has no plans to put the company on the block, but she has not ruled out a deal with Microsoft Inc, which covets Yahoo's search business as a way to compete with the market leader Google Inc.

"Short term the market wants a deal with Microsoft. It's plain and simple," said Thrivent Financial fund manager Mike Binger, who does not have a position in Yahoo but owns Google shares.

"To most outside observers this deal seems like a no-brainer," Binger said. "But to the people that have to do the deal, they can't get it done. I'm not sure why. My guess is it's a matter of price."

Yahoo's co-founder and previous CEO Jerry Yang rejected Microsoft's $47.5 billion offer last year to buy the company outright, leading to much shareholder angst.

But a sale of Yahoo's search business raises a host of other questions, given how important the business is to Yahoo's culture and its products.

A sale of the search business allows Yahoo to pare operating expenses, but data generated by search is a valuable asset for companies like Yahoo that depend on advertising revenue.

Search data is used to generate text-based ads that appear alongside Web search results, and increasingly to aim custom tailored display advertisements at Web surfers -- something Yahoo began doing with new advertising features last week.

Any sale of the search business would need to guarantee Yahoo access to the search data, analysts say, though relying on an outside company could make Yahoo uncomfortable.

In January, Yahoo had a 21 per cent share of the U.S. Internet search market, compared to Google's 63 per cent, according to market research firm comScore.

No Deal Needed-RBC
Investors may get a chance to learn more about Bartz's current thoughts on a search deal, as well as her overall strategy, when she speaks at a Morgan Stanley technology conference in San Francisco later on Tuesday.

RBC Capital Markets analyst Ross Sandler said Yahoo does not need to sell its search business to revive its fortunes.

Yahoo already has a strong position in display advertising, and the fragmented nature of the market means there is room to grow, he said, noting that 80 per cent of Yahoo's roughly $1.8 billion revenue run-rate in display advertising is sold on 20 per cent of its available inventory of online pages.

"If they can figure out how to sell that more effectively, then there's a real interesting story to be told," said Sandler, citing the benefit of marrying search data with display ads as a key factor.

But he acknowledged the weak economy and tough ad market meant Yahoo might not reap any benefits until after 2010.

How much time Yahoo can expect from its shareholders -- whose ranks include activist investor Carl Icahn, a Yahoo board member -- is unclear. Icahn did not return a call for comment.

The stock is down 14 cents at $12.45 in Tuesday's Nasdaq trading, It has fallen roughly 34 per cent since Microsoft's initial offer in February 2008.

With $3.45 billion in cash and marketable securities, Bartz could seek to bolster Yahoo by acquiring businesses. The company held talks with Time Warner Inc's AOL last year. There are also various start-ups that could make Yahoo a bigger player in the world of online social networking.

According to some observers though, Yahoo will face a high bar among investors if it goes down the acquisition path.

"Any strategy for growth through acquisitions has to be considered relative to the other option," namely last year's Microsoft bid, said Sydney Finkelstein, professor at the Tuck School of Business at Dartmouth and co-author of the book "Think Again, Why Good Leaders Make Bad Decisions."

Accepting Microsoft's offer would have meant $30 billion in value creation for Yahoo shareholders, said Finkelstein. "Is there any strategy you can possibly come up with that gets you anywhere close to that in the foreseeable future?"


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