Google earnings surprise may give Yahoo leverage

By Michele Gershberg - Analysis

NEW YORK (Reuters) - An earnings windfall for Google Inc should benefit rival Yahoo Inc in buyout talks with Microsoft Corp, as investors view the results as proof of a robust online advertising market.

Yahoo is entering a critical week as it prepares to report quarterly results on Tuesday and faces a Microsoft-imposed deadline to accept the nearly $43 billion offer.

The software maker has cast doubt on whether Yahoo is even worth that much with a weakening U.S. economy and general slowness in the ad industry. Google's strong showing could help its rival Yahoo stand firm on a higher takeover price on hopes Web marketing is more durable in a downturn.

Industry analysts say Yahoo's first-quarter results are going to be a major swing factor in its talks with Microsoft.

"The one thing that can really change Microsoft's thought process on valuation is if they can come in with good results," said Ross Sandler, analyst at RBC Capital Markets. "We think there is a decent likelihood of upside from Yahoo this quarter."

Yahoo forecast first-quarter net revenue at $1.28 billion to $1.38 billion. Analysts, on average, are expecting profit of 9 cents per share, excluding special items, on revenue of $1.32 billion, according to Reuters Estimates.

Google on Thursday reported a better-than-expected profit and revenue growth of 42 percent. It said client spending had not been hurt by economic concerns, sending its shares up nearly 20 percent to $538.43 on Friday. Yahoo rose 1.7 percent to $28.51.

"In terms of today and next week, there's going to be a lot of upward momentum for all of the Internet companies" who rely on ad revenue, Sandler said.

For example, Internet conglomerate IAC/InterActiveCorp shares rose 2.8 percent, while online marketing firm ValueClick Inc gained more than 8 percent.

NO SLOWDOWN HERE

Google Chief Executive Eric Schmidt said his team had carefully reviewed scenarios regarding the economy, and concluded that even if conditions worsened, its search advertising would still attract companies as an efficient way to reach customers.

"This signals that the online advertising market is still healthy, which should help Yahoo get a better price for its company," said Peter Dunay, chief investment strategist at Meridian Equity Partners.

Internet advertising executives bolstered Schmidt's rosy view, saying their clients were actually spending more money online at both Google and Yahoo.

"We have had a handful of clients come to us knowing there is a downturn who are actually looking at it as an opportunity to increase (market) share," said Kelly Twohig, senior vice president at Starcom USA, who manages the agency's digital media buying. Starcom is part of Publicis.

Part of the rationale is that consumers who find their home budgets shrinking will be more zealous in seeking out information on products and comparison shopping online.