Fallout from the collapsed talks between Microsoft (MSFT) and Yahoo (YHOO) continues to spread. Goldman Sachs raised its Google (GOOG) target this morning, citing “disarray” among Google’s two largest competitors:
Any search affiliate choosing a partner at this time may bias toward Google as the safe choice in an uncertain world, helping Google retain its network leadership while potentially slowing its Traffic Acquisition Cost (TAC) growth; TAC is Google’s single largest expense and its growth slowed from 48% yoy in 4Q07 to 32% yoy in 1Q08, due in part to lapping key partner additions but likely also to its competitors’ travails.
Perhaps more importantly for Google, the ground may now be clear for a search deal with YHOO. The deal could be very lucrative:
Using 2009 metrics, we estimate that Google could pick up $300 mn in net revenue from Yahoo’s own searches (60% RPS uplift, 90% TAC to Yahoo!) and ~660 mn from capturing Yahoo!’s current search affiliates, for a total net revenue enhancement of ~$960 mn (or 5%), an EBITDA enhancement (80% post-TAC margin) of 7%, and an EPS enhancement of 8%. We are not building this into our model due to uncertainty around the terms of an alliance, regulatory issues, and Yahoo!’s ownership.
6-month target price to $650 from $560.