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Microsoft, Yahoo May Partner to Challenge Google in Web Search
By Jonathan Thaw and Jason KellyMay 5 (Bloomberg) -- Microsoft Corp. and Yahoo! Inc. have held talks about a partnership designed to boost their share of the Web search and advertising market and catch up with Google Inc., people briefed on the discussions said.The discussions are in the early stages and focus on a partnership rather than a merger, said one of the people, who asked to remain anonymous because the negotiations are private. Shares of Yahoo jumped the most in three years yesterday after the New York Post said Microsoft wants to buy the company.Yahoo and Microsoft, the world's largest software maker, have struggled to dent Google's dominance in searching the Web and in the booming market for advertising spots next to search results. A combination would triple Microsoft's share of the U.S. search market to 38.4 percent, rivaling Google's 48.3 percent, according to ComScore Inc.``It gets them enough economies of scale to be a viable force in search,'' said Walter Price, who oversees about $2 billion including Microsoft shares at RCM Capital Management in San Francisco. ``You have to ratchet up your capital expenditure to compete with Google.''Adam Sohn, a director in Microsoft's online services group, declined to comment on the report. Joanna Stevens, a spokeswoman for Yahoo, owner of the second most-popular search engine, said the company doesn't discuss ``rumor or speculation.''Microsoft asked to start talks about a takeover and is working with Goldman Sachs Group Inc. on a possible deal, the Post said, citing unidentified bankers. The Wall Street Journal reported yesterday that the two explored a combination a year ago and have now renewed talks. Later in the day, the newspaper said those merger talks are no longer active.Market ValueShares of Yahoo surged $2.80, or 9.9 percent, to $30.98 yesterday in Nasdaq Stock Market trading, the biggest rise since April 2004. Redmond, Washington-based Microsoft slipped 41 cents to $30.56.Yahoo, based in Sunnyvale, California, has a market value of $42 billion. The company has been valued at as much as $50 billion by Wall Street analysts, the New York Post said.It may take Microsoft a decade and tens of billions of dollars to catch Google with internal development, said Peter Misek, an analyst with Canaccord Capital Inc. in Toronto.``Their only other real choice to catapult into a really competitive position is either to buy five to 10 smaller companies or buy something like Yahoo,'' said Misek, who rates Microsoft ``buy.'' He said there is a 60 percent to 70 percent chance a deal will happen in six to nine months.Previous PartnershipMicrosoft Chief Executive Officer Steve Ballmer has been boosting spending to draw more users to its Internet service and develop its search engine to compete with Google. Both Yahoo and Google have been more successful in winning online advertising clients because they have a greater share of the search market.Yahoo previously had a partnership with Microsoft to supply ads that appear next to search results on Microsoft's site. That accord ended when Microsoft introduced its own ad sales program, called AdCenter. The companies have also worked together to let users of their instant messaging networks chat to each other.Yahoo has probably been in talks with Microsoft for the past two years, Gene Munster, an analyst at Piper Jaffray & Co., said yesterday in a note. There's a 25 percent chance that Microsoft will buy Yahoo in the next six months, he said.`Exit Strategy'Yahoo's growth is slowing as Mountain View, California- based Google steps up competition in the Internet search ad market and advertisers seek new outlets such as Facebook and MySpace. Yahoo's revenue rose 7 percent last quarter, the first time in five years that it had fallen below 10 percent.Yahoo CEO Terry Semel has come under fire for the slump in growth. The stock sank 35 percent last year after a new ad program was delayed and earnings disappointed investors.While the software is now in place, Yahoo hasn't shown a significant gain in sales. Semel has yet to name a new finance chief after Susan Decker moved to oversee ad sales and hasn't named a so-called audience head, who would oversee products.A deal with Microsoft may alleviate some of the pressure Yahoo faces on its own, said Norman Pearlstine, who advises on media and communications acquisitions for Carlyle Group.``There is a logic to it and I think there's also a question whether it might not be a great exit strategy for Terry Semel,'' he said.Profit MarginsIn March, Google surpassed Microsoft and Yahoo for most- visited group of Web sites for the first time, according to Reston, Virginia-based ComScore.That would change if Microsoft bought Yahoo. The companies had a combined 634.3 million unique global visitors in March, while Google had 528 million, ComScore said.Adding Yahoo would dilute Microsoft's profit margins, the highest among software companies, according to Bloomberg data. Yahoo had margins of 12 percent for 2006, and Microsoft's were 28 percent for its fiscal 2006, which ended June 30.``I hope it's not true,'' said Whitney Tilson, who oversees about $172 million at T2 Partners LLC in New York. T2 owns Microsoft shares. ``Acquiring Yahoo as opposed to partnering with them doesn't make sense.''A purchase would follow recent acquisitions by Google to expand beyond text ads linked to Web search results. The company agreed to buy DoubleClick Inc. last month for $3.1 billion to gain technology used to track advertising campaigns and purchased video-sharing Web site YouTube for $1.65 billion last year.The takeovers also highlight the soaring valuation for Internet companies that have managed to strike a chord with users and advertisers. Social networking site Facebook last year turned down a $1 billion offer from Yahoo. Microsoft yesterday said it agreed to buy Paris-based ScreenTonic SA to add products for selling ads on mobile phones.``Once Google bought DoubleClick the ability for Microsoft to build via smaller pieces a viable competitor to Google disappeared,'' Misek said.Last Updated: May 5, 2007 00:03 EDT .
To contact the reporter on this story: Jonathan Thaw in San Francisco at [email protected] ; Jason Kelly in New York at [email protected] .
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