A search outsourcing deal with Microsoft could leave Yahoo with a little more cash in its wallet, potentially up to $1.3 billion more, according to a research report released Tuesday by Jefferies & Co.
With reports that Yahoo and Microsoft are holding preliminary talks to explore a search and display advertising partnership, Jefferies analyst Youssef Squali noted that such a deal could save the Internet search pioneer a tidy sum of money.
The parties could, for example, have Yahoo outsource its search infrastructure to Microsoft, and in turn, Microsoft would outsource its display advertising to Yahoo.
In his report, Squali noted:
Outsourcing the search infrastructure could bring Yahoo incremental savings of $1 billion to $1.3 billion. Finally, any upfront cash from Microsoft (as offered in July) could be deployed by Yahoo for either share buybacks or M&A.
Given the long-term importance of integrated search+display offering, however, we believe Yahoo would need to reserve the right to a) regain full control of its search assets in the future and b) maintain full access to search data in order to improve targeting of its display ads.
Meanwhile, if Microsoft where to split its display advertising revenues 50-50 with Yahoo, that could result in roughly $600 million to $800 million in incremental revenues to Yahoo. During the fourth quarter, Squali estimates Microsoft generated $300 million to $400 million in display advertising.