NEW YORK (Reuters) - Yahoo Inc may not be celebrating the end of takeover talks with Microsoft Corp, but their mutual rival Google Inc should feel free to pop the champagne cork.
The rift between Microsoft and Yahoo leaves the online advertising market wide open to Google’s expansion. What’s more, it puts Google in the coveted position of deciding the fate of its closest rival, analysts said.
Microsoft withdrew a $47.5 billion offer for Yahoo on Saturday after the Internet company dug in for a higher price.
Yahoo investors see only two viable options -- returning to negotiations or letting Google serve up some of its search listings since it makes more money off the ads.
With Microsoft holding firm for now, that leaves Google in the driver’s seat when it comes to determining Yahoo’s fate.
“It’s good news for Google. They will continue to grow their dominant share,” said Jane Snorek, senior technology analyst at First American Funds. “In the long run, I just think the Yahoo customer would go directly to Google.”
Google and Yahoo are still working out the details of a potential search deal and are sharing the plans with antitrust regulators to dispel concerns, a person close to Google said on Monday. But no final agreement has been reached yet.
A deal be would icing on the cake for Google, adding about $1 billion in annual revenue and about $1 to earnings per share, assuming a 50-50 split on ad revenue, Snorek said.
While Google doesn’t need the partnership on its own account, it may have a defensive interest in reaching a deal.
“They’re doing it more as a favor,” she said. “Google can’t let Yahoo fall to $15 again because they can’t have Microsoft buying Yahoo.”
An ad deal with Google could add as much as $6 a share to Yahoo’s stock price, based on the results of a test between the two companies, a person involved in the discussions said.
THERE GOES THE COMPETITION
Yahoo, however, is now viewed in need of a deal to prop up its value after rejecting a $33-per-share offer from Microsoft. Chief Executive Jerry Yang insisted the company is worth $37 per share, but Wall Street doubts it can get there alone.
Google last month waved off fears that it would suffer from a U.S. economic downturn, reporting 42 percent gross revenue growth in the first quarter. Yahoo posed a 9 percent rise for the period, or 14 percent excluding payments to ad affiliates, and expects 3 percent to 15 percent growth for the full year.
Sanford C. Bernstein analyst Jeffrey Lindsay estimates Yahoo’s stand-alone value at closer to $25 per share, leaving out any deal with Microsoft or Google. Yahoo shares closed at $25.72 on Tuesday.
“If it turns out that Google was just being used to thwart Microsoft, I think the investor reaction will be very negative,” he said.
While Google is by far the leader in search, a combined Microsoft and Yahoo could have presented a challenge in new frontiers of online advertising, from Web video to messaging and mobile Internet.
“That’s where there is open territory for anybody to win. Google stands to continue to further distance themselves from the pack,” said Dan Davidowitz, portfolio manager at Polen Capital Management which owns shares in Microsoft and Google.
On the flip side, a Yahoo-Google alliance is widely expected to draw regulatory scrutiny for combining the Internet’s two largest players.
Sarah Fay, CEO at media buyer Aegis Media North America, said a combination of the two would be the closest thing yet to a monopoly in the online advertising space.
“What Google is missing now is true depth of offering in display, e-mail and instant messaging, and those are areas where Yahoo is very strong,” she said. “It feels a bit like too many eggs in one basket.”
Derek Brown, analyst at Cantor Fitzgerald, said Yahoo should still think twice before it gives up even a segment of its search after investing to upgrade its technology.
“If part of Yahoo’s mission is to become a one-stop shop for people looking to buy all types of online ads, then outsourcing search ... seems like a step backwards,” he said.
But if Yahoo’s ultimate aim was to avoid Microsoft’s embrace, a long-term Google deal could buy it time to advance elsewhere while warding off the unwanted suitor.
“It’s more of a poison pill if they don’t have an out clause ... and it’s multi-year,” said Todd Dagres, general partner at venture firm Spark Capital.
Additional reporting by Anupreeta Das in San Francisco; Editing by Braden Reddall
Our Standards: The Thomson Reuters Trust Principles.