The disintegration of the Google-Yahoo search partnership should effectively eliminate Yahoo's chances to buy AOL and make it a tantalizing target for Microsoft yet again.
Yahoo, whose roller-coaster of a year began with an unsolicited and unwelcome bid by Microsoft, got more bad news Wednesday when Google walked away from the deal in the face of a Justice Department review, which was inclined to conclude it would be anti-competitive and was prepared to litigate to prevent it happening.
"It’s very hard to see how a Yahoo/AOL deal could happen," Bernstein Research analyst Jeffrey Lindsay. "That would mean that Yahoo is in a very attractive proposition for Microsoft."
The collapse of the Google search deal denies it the $250 million that Yahoo expected to make in the next year from serving Google advertising to key words that are currently making little to no money for Yahoo.
Without that income Yahoo would have to rely on a stock-based transaction to acquire AOL. But Yahoo's share price isn't high enough to reach the $8 billion asking price that Time Warner is thought to want. At best, Yahoo might be able to swing $4 billion, says Lindsay, but it doesn't make sense for Time Warner to sell at such a discount when AOL continues to bring in money for the company.
And if Yahoo is unable to prop up its struggling online businesses, it will be even more ripe for a takeover from Microsoft.
The company's stock now hovers around $14, well below Microsoft's May offer of $33 per share. Yahoo walked away from Microsoft's offer to buy the company for $47.5 billion in May and entered into the non-exclusive partnership with Google in June. But with that deal officially defunct, Yahoo is in a much more perilous position than it was this summer.
Microsoft insists it is no longer interested in purchasing Yahoo regardless of its discounted price, but many analysts — Lindsay included — don't believe it. It worked actively to get the Google-Yahoo deal killed —
spending millions on lobbying efforts and working to get groups from
The Association of National Advertisers to American Corn
Growers Association to come out in opposition to the deal, and it's easy to see how today's outcome could lead to a Microsoft buyout.
"If anything, Microsoft's desire for Yahoo has actually gotten greater"
since May, says Lindsay. "The part Microsoft really wants is Yahoo's search business, and that’s holding up really well. Now Microsoft won't have to pay a huge premium for what it didn’t really want."
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