Wall Street: Microsoft wins over Yahoo

If stock moves are any indication of who got the better deal, Steve Ballmer and company made out like bandits.

By Michael V. Copeland, senior writer

SAN FRANCISCO (Fortune) -- Let's say you own shares of Microsoft, Google and Yahoo (not sure why you would, but if you do, might we suggest reading up on a little something called diversification). How did your investing day go on the day Microsoft and Yahoo announced their long-anticipated search deal?

At the close of the market Wednesday, Microsoft (MSFT, Fortune 500) was up a tad, almost 1.5%. So far so good. Google (GOOG, Fortune 500) fell a bit, down almost 1%. Not so bad -- for comparison's sake, the Nasdaq was down 0.4%. And Yahoo (YHOO, Fortune 500)? The Internet's whipping boy (or girl as you may prefer) plummeted 12%. Ouch.

So if you take the Street's view of the deal, it's somewhat good for Microsoft, somewhat bad for Google, and about 12-14 times worse for Yahoo than it is for Google or Microsoft respectively. That's actually a pretty good summary of what went down.

It does look like Microsoft made out pretty well here. Steve Ballmer and crew get to unleash their shiny new search engine Bing on Yahoo sites, and become something less than the bit player they have been in search. The best part? Microsoft doesn't have to pay Yahoo anything up front for the privilege.

Last summer Ballmer was willing to pay $1 billion to buy Yahoo's search business. Wednesday, he got it all with no upfront payment. Microsoft has only to guarantee Yahoo an unspecified revenue per search amount for the next 18 months, and pays out 88% of the search ads sold on Yahoo owned and operated sites for the first five years of the agreement.

That is a big deal, but it ain't $1 billion in Yahoo's pockets. Microsoft got a deal, and Yahoo let go of one of its most precious assets for a pittance. That is the way the Street took the deal on day one, and that is why Yahoo stock was punished.

Yahoo CEO Carol Bartz is making big moves, you have to give her that. There will be cost-savings for Yahoo, and maybe it gets to write off some assets. It also gets to refocus its efforts on building its own sites and its display advertising business.

Whether Yahoo succeeds going forward will depend on that. It's effectively out of the search game, and if search is what really matters (as it would seem Microsoft believes given all its investment and efforts) then now is time to take a long-hard look at Yahoo shares and ask yourself if you believe the story Bartz is selling.

Microsoft is looking like a comer in all this. Ballmer is dead-set on winning in search, or at least making it a race, and that is the right approach. Bing is performing, this deal just went down, and Windows 7 is on the horizon. Things are humming along up in Redmond, Washington, and if PC sales aren't as bad as everyone fears in the coming year, Microsoft is looking like a good bet.

The other place to put your money, however, is Google. The search deal announced Wednesday is incredibly complicated. First it has to make it past the Department of Justice and the European Union, which it likely will sometime in 2010. Then Yahoo has to extract its technologies -- to say nothing of its people -- and Microsoft has to integrate the whole mess. That will take time, and results, as we have seen with massive deals like this, vary widely.

During all that time Google can keep plowing ahead, undistracted, into mobile search, into its new Chrome operating system and into the dozens of other irons it has in the fire. And then there's the biggest question of all: Just because this deal has happened, will users switch from Google to the new Microsoft/Yahoo search?

If that happens, it would cause advertisers to reallocate their search spend, points out Citi analyst Mark Mahaney in a note to clients. "But advertisers will only change if users change," Mahaney says. "We're skeptical this will happen." To top of page

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