John Paczkowski

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Analysts to Yahoo CEO: Where Are Those "Boatloads of Money" You Were Talking About?

microsoft_as_yahooWall Street is finally having its say about the newly announced Microsoft-Yahoo deal, and while opinions are mixed, there is some consensus on who got the better end of the deal: Microsoft.

Seems the Street would have much preferred the “boatloads of money” Yahoo CEO Carol Bartz once said she’d demand for a search deal, than the “boatloads of value” she claims to have given them this morning. As I write this, Yahoo (YHOO) shares are trading down more than 12 percent at $15.14. Microsoft (MSFT) shares are up 1.41 percent at $23.80.

Below, a roundup of analyst notes that have been issued on the deal.

Jeff Lindsay, Bernstein Research: We believe Yahoo!’s search deal represents a significant positive for the company’s economics, as both Yahoo! and MSFT were too subscale to compete effectively versus Google. Although the combined 30% search share is still less than half the size of Google, both Yahoo! and MSFT will realize significant cost savings from combining their search technologies. In addition, the greater scale should increase the effectiveness of the search engine, driving revenue synergies through improved search monetization.

Sarah Friar, Goldman Sachs: We view the deal as positive for Microsoft as terms are better for the company than had been speculated (no upfront fee; 88% TAC) and the combined market share provides scale to drive efficiency and legitimacy/relevancy for Microsoft’s online investments. Yahoo!’s $3.0 bn/year search sales translates to $360 mn/year for Microsoft in revenues. Microsoft will incur incremental expenses when the deal closes (expected early CY10), but limited (if any) impact on FY10E and while investments will continue into FY11, our model already assumes sizable expenses.

Douglas Anmuth, Barclays: YHOO-MSFT terms not nearly as favorable as anticipated, but we believe deal is neutral to the co’s L-T positioning. We would have liked to have seen an upfront payment, higher TAC, & rev share on Bing.com searches among other things, but we like that YHOO maintains ability to sell search adv, & therefore relationship with its largest advertisers. It’s unclear how favorable the deal will be to YHOO over time, but our fundamental reasons for owning shares remain the same. We expect better execution on the audience & content biz & specifically within display adv., & we believe YHOO will be able to take out a meaningful amount of costs from the biz aside from search tech. over the next couple yrs.

Peter Misek, Cannacord Adams: We are relieved that Microsoft did not have to provide an upfront payment as part of this deal while effectively garnering more scale. This deal provides Microsoft with a much needed boost in competing with Google (GOOG : NASDAQ : US$435.00 | BUY) as its search algorithm, Bing, is being catapulted to greater market share. In addition, utilizing Yahoo!’s sales force for premium search will allow Microsoft to lower expenses over the duration of the partnership while attempting to attract a greater level of advertisers for the combined platforms. We believe this is a much needed relief for Microsoft, but is one step in a greater battle. In the end this doesn not solve Microsoft’s competitive disadvantage with Google. Rather we think it accelerates Microsoft’s desire to think outside the box and come up with a non-linear way to catch Google.

Heath Terry and Andrew Thomas, FBR Capital Markets: The lack of an up-front payment, no minimum revenue guarantee, and a revenue share that, while above average, is slightly below the +90% that larger deals command make for a lackluster deal for Yahoo!, in our opinion. The lack of any display component to the deal also seems like a missed opportunity for the company. As we see it, the only financial benefit to Yahoo! is the ability to shed the not insignificant technology costs associated with running a search engine. According to the company, this should result in an annual benefit to GAAP operating income of $500M….Restructuring these two businesses and untangling them from their existing partnerships and internal ties will be a massive organizational challenge for both companies.

Mark Mahaney, Citi Investment Research: Implications For YHOO – Positives: 1) YHOO believes deal would generate incremental $250MM in annual cash flow (17% accretive to our ’09 est)–assumptions very hard to test, but magnitude is reasonably conservative; 2) 88% TAC is higher than industry average, but as expected given deal size. Challenges: 1) No upfront payment to YHOO is a negative vs. expectations, tho guaranteed RPS provides significant backstop; 2) Lack of display advertising deal is a negative vs. expectations; & 3) Acknowledgment of YHOO’s Search technology limitations.

Todd Greenwald, Signal Hill Capital Group: The deal announced today will take a very long time to come to fruition we think, and will face several challenges–it will face regulatory hurdles given Microsoft’s antitrust history (though we’d expect it to ultimately get through given Google’s dominance). Additionally, it seems hard to fathom operationally, as it will require Yahoo’s salespeople to be selling Microsoft’s technology. Advertisers will want one point of contact (which would be Yahoo), though that point of contact won’t be entirely responsible for what they are selling–instead of bringing in an engineer from within the same building, the Yahoo salesperson may have to coordinate with a Microsoft employee up in Redmond. Not impossible, just tricky. And considering how smooth and automated the process of buying ads is on Google’s platform, this could prove to be a competitive disadvantage.

Mark May, Needham & Company: Search advertising is not a zero sum game, in our opinion. If Microsoft is able to make Yahoo! (and Microsoft) search more effective through this deal/combination, then we believe is will result in advertising spending more on the new search platform but not less on the Google platform. A more effect Yahoo!/Microsoft search platform does not mean Google search becomes less effective, and we believe there is more demand than supply for effective search marketing. The dollars will likely come from other, less effective, buckets.

Business 101 convincingly argues that most large M&A deals and partnerships are not successful. And, most large-scale Internet media M&A deals and partnerships have tended to under-perform their original promise (e.g., AOL Time Warner, Google/MySpace, etc.). Moreover, in the case of Yahoo!/Microsoft Search, you have two very different cultures and an expected 24 month transition process. The odds are stacked against this deal having a meaningfully impact on Google. And, over the next 2+ years while Yahoo! and Microsoft are trying to transition, Google will be innovating.


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