What the Failure of the Yahoo-Google Deal Means

So the Google-Yahoo search deal finally fell apart. It’s not terribly surprising. From the beginning, I said that this deal was very problematic, probably anti-competitive, and would raise the ire of government regulators.

Google read the handwriting on the wall and realized the deal no longer made sense. So it pulled the plug this morning.

Yahoo! is clearly the big loser here. They don’t get hundreds of millions in additional revenue that the deal would have generated. Once again they do not have a strategy for turning around the company. And with the economy getting worse, the online display ad market is likely to deteriorate for at least a few quarters, and it may even see negative growth.

“Time is not on their side,” says Dave Morgan, the former chairman and CEO of Tacoda, an online ad network that was sold to AOL in September of 2007 for a reported $275 million. “The longer they wait the worse their numbers get.”

So why is Yahoo’s stock up 6% when the stock market is down 3% today?

Clearly, the market thinks that the failure of the Google deal means that Yahoo is takeover bait again. Problem is, they are running out of dance partners. “It’s a game of musical chairs and the music is stopping and there are not many chairs left,” says Morgan, who left AOL in March.

Google can’t acquire them. Microsoft is probably leery of re-engaging with Yahoo as long as Jerry Yang is running the show. That leaves AOL. It wouldn’t be a merger of strength but it may be Yahoo’s only option at this point–unless the board boots Jerry and invites Microsoft back to the table.

And who wins? Microsoft is the big winner here. Either it gets to buy Yahoo on the cheap, or it can steal market share from Yahoo while the company continues to flail and dither.

“All of this stuff creates an extraordinary distraction for people who buy and sell advertising,” says Morgan. “Who wants to cut a big deal with Yahoo if they have to unwind it a few months from now?


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