Another small Yahoo (YHOO) leak in the Journal should start some conversations at Microsoft (MSFT) today: The Yahoo-Google search test has been judged a success, and the companies are now moving toward a full outsourcing deal.
As we’ve said, we believe the search partnership is a brilliant 11th-hour counter move by Yahoo will force Microsoft to pay more for Yahoo than it otherwise would have:
- First, by allowing Yahoo to boost its cash-flow projections by $500 million or more a year, and,
- Second, by forcing Microsoft to buy Yahoo to break up the partnership. If Google and Yahoo work together and Microsoft doesn’t buy Yahoo, Microsoft’s own search platform will be rendered almost entirely irrelevant. (It’s headed there anyway, which is why Microsoft wants to buy Yahoo).
Upon the announcement of the test, Microsoft quickly argued that a Google-Yahoo search partnership would be illegal. After looking into this, we believe Microsoft would have a credible argument to support this, but we also believe that Yahoo would have a reasonable counter-argument, so we don’t think any litigation would be resolved quickly. The WSJ also notes that the two companies are aware of the regulatory hurdle and are designing the terms of the deal to minimize regulatory risk (by eliminating certain regions or categories).
Yahoo is supposed to have a meeting with Microsoft week. Given that we haven’t heard about it yet, it’s likely happening today or tomorrow. The Google-Yahoo partnership will be an elephant in the room.
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