Yahoo defends Google deal

Updated at 2:35 p.m. with a source clarifying that this letter does not mean talks are off.

On Wednesday, Yahoo issued a letter to shareholders defending its pact with Google as compared to a search deal with Microsoft.

"This carefully structured agreement strikes the right strategic balance, enhancing our financial results while advancing our strategic objectives of being the 'starting point' for the most users on the Internet and offering such compelling value that advertisers will see us as the 'must buy' in online advertising," Yahoo Chairman Roy Bostock and CEO Jerry Yang wrote in the letter, which was sent out via Business Wire.

At first blush, I took this as an indication that the latest talks, which were first reported by CNET News.com on Monday, were off again. However, a source familiar with the situation cautioned that such a reading would be a mistake.

The letter urges shareholders to vote for its director slate and against that put forth by Carl Icahn. In the letter, Yang and Bostock argue that Microsoft's proposal would have tied Yahoo's hands without offering a significant improvement to its cash flow.

"While Microsoft's search-only hybrid proposal may have been helpful to Microsoft, our board and management concluded it would have had a significant adverse impact on Yahoo! strategically, leaving the Company without the operational control of search assets and technology we view as critical to our objective of becoming a leader in the converging search and display advertising business," Yang and Bostock wrote. "The board and its advisers also carefully studied the financial impact of Microsoft's proposal and concluded that it would have provided no meaningful improvement to our operating cash flow. In short, this proposal would have generated substantially less value for Yahoo stockholders than Microsoft has suggested."

The source I talked to pointed to the exclusiveness of the deal as a key stumbling block with the original proposal from Microsoft and noted that the Google deal was a nonexclusive one.

As of June 12, when talks broke down with Redmond, Microsoft was proposing a deal in which it paid $1 billion for Yahoo's search business as well as giving it a cut of future revenue from Yahoo's search results. It would have also paid $8 billion for a 16 percent stake in the company. Microsoft argued the additional ad revenue as well as the decrease in costs would have meant $1 billion in additional cash flow per year. Yahoo disputes that math.

Microsoft said it offered to guarantee Yahoo that its search monetization would be better than that of Yahoo's Panama for the first three years.

[Kwasiowusu]

The best judge of whether the yahoo/google deal was good for shareholders, was the rapid fall in yahoo share price in 10 of the next 11 days after the yahoo/google deal was announced. The market has clearly given the deal a big thumps down, and just yesterday, yet another analyst predicted a yahoo price targhet of just $18, from a previous target of $28. Personally, I am think yahoo is headed for $12 in the next 3 years, if not sooner.

[JCPayne]

The rapid fall of Yahoo's stock could be predicted because it became bloated to begin with by a lot of speculative buyers that wanted to get in before Microsoft would have made a pay out to Yahoo shareholders had the merger happen. Just like any time a merger is "mooted" the stocks between those companies will bulge and drop if the talks are called off.... Yahoo still had a second quarter that passed- expectations of analysts.

[andymars]

I defintley think this was the appropriate move for Yahoo.
I?ve been feeling pretty bullish about GOOG lately too. Recent news is speculating how Google may monopolize search advertising and drive up prices through its new Yahoo partnership but I feel Microsoft is inflating these rumors because they simply don?t want the deal to go through. The Yahoo partnership seems to be coming at a good time too. GOOG and YHOO prices dropped dramatically this morning along with community sentiment at http://www.predictwallstreet.com/forecast.aspx?symbol=GOOG. Predictors at PredictWallStreet.com predict Google close up tomorrow and I have to agree. In the long run, the Yahoo partnership will prove to only be beneficial for both companies.