Investors pushed shares of Yahoo up in morning trading Wednesday as analysts point to stronger profit margins due to cost cutting and a healthy increase in its search advertising revenues.
The Dow Jones Industrial Average, meanwhile, was down 298.30 points to 8,739.12 and the Nasdaq fell 34.01 points to 1,662.67.
Yahoo rose as high as 5.8 percent to $12.77 a share in intra-day trading, following weak third-quarter results it reported after the markets closed Tuesday. Yahoo's shares were moving in the black in the morning, while the broader markets were posting losses.
USB Securities analyst Ben Schachter noted that while the Internet search pioneer still has a number of problems it has yet to resolve, he remains bullish on the stock for several reasons.
The Wall Street analyst cites several actions the company announced, ranging from cutting 10 percent of its headcount to potential in building its core display advertising business.
Said Schachter in his note:
We still like the display strategy, though execution is key--Yahoo is the clear leader in display. If it can execute against its plan (centered around the APT platform), Yahoo could build a scalable, highly targeted and measurable display ad platform and network that would dominate display advertising across the Web.Cost cutting--The company announced its intention to cut $400 million in annual operating expenses by the end of 2008 and to pursue "substantial additional cost savings" in 2009.
Schachter, who reiterated his "buy" rating and 12-month $20 price target, also pointed to Yahoo's cash, the fact that short-term and Asian investments combined are worth $7 a share, and that an eventual Microsoft acquisition remains a possibility.
Other analysts, however, remain cautious on the stock.
J.P. Morgan's Imran Khan noted in his report that while Yahoo's search advertising revenues grew 17 percent year over year, it may not be enough to turn the tide against market share losses.
Khan wrote in his research note:
We think long tail advertisers are shifting money from nonperformance-based advertising to the performance-based model and that Yahoo is seeing the benefit of this trend. Additionally, some of the monetization improvement the company made earlier this year supported RPS (revenue per search) growth of 11 percent year over year in the U.S. While we were encouraged by RPS gains, we are still concerned with market share losses. We believe that if the company continues to lose market share, the monetization improvement may stall.
Khan also expressed concerns Yahoo may be losing market share in its core display advertising business to niche sites, and that it should proceed cautiously in its cost cutting to avoid slowing investment in its core platform.
The analyst also noted it appears the controversial Yahoo-Google search advertising partnership is facing opposition from federal antitrust regulators in its current form and, as a result, he is removing $250 million in revenues from his fiscal 2009 forecast relating to the outsourcing agreement.
Analyst Sandeep Aggarwal of Collins Stewart also remains somewhat bearish on the company.
Aggarwal, who maintains a "hold" recommendation, said in a research report:
Though we were impressed with 11 percent RPS lift, arguably not sustainable in a weak economy, and President Decker was largely upbeat on Q4 guidance and Yahoo.com demand, we continue to believe that economic headwinds will affect business. Looking at series of events in past 1 year, i.e. Jerry Yang becoming CEO and announcing his 100 days plan, Microsoft's bidding in January, Yahoo pursuing new investments/strategic alternatives, and now cost cuttings--we continue to believe that the best option to unleash Yahoo's value is to reengage in talks with Microsoft for a search related deal.Wall Street analyst Jim Friedland of Cowen & Co., meanwhile, offered investors a bit of good news/bad news to chew on. While Yahoo is expected to continue to lose market share in search, its search revenues are expected to grow for the next several years. But come three or four years from now, those search revenues are expected to peak.
Google and Yahoo are household names. But, Sandy Litvack? Not so much.
While Litvack may be obscure to the general public, he is well-known in antitrust circles as a sharp litigator--and one who Yahoo and Google may soon become acquainted with if the Department of Justice challenges the companies' controversial search advertising partnership.
Sandy Litvack in 2004. (Photo credit: Kevin Heslin/Getty Images)
For now, it's unclear whether the scope of the investigation will only focus on the Yahoo-Google deal. Some sources told CNET News that a federal investigation could broaden to examining Google's overall impact on the marketplace.
But there’s little question that bringing in Litvack indicates just how serious federal trustbusters are in their pursuit of Google.
Litvack, a
Given his reputation as a sharp litigator, some former DOJ attorneys say the antitrust staff has likely completed its analysis of the case, and is now seeking Litvack's assistance on whether he could build a case that could be won at trial.
"They're not using Sandy to analyze the facts of the case. They're not asking his opinion whether this is a good thing or a bad thing," said one former DOJ antitrust attorney, who requested anonymity. "They want to know if he thinks he can sell this case in court."
In order to make a complex case simple so that a judge hearing the antitrust case will understand it, the prosecutors will want to simplify it, latching onto issues such as market share that can be understood in a courtroom. That's where someone like Litvack would come in.
"Good litigators can take a complex subject and make it sound simple," the source said.
By most accounts, the Yahoo-Google transaction announced in June is complex. The non-exclusive agreement allows Google to have its ads appear on Yahoo's search pages. Although Yahoo notes it is free to decide where Google's ads will appear and to what extent they will appear, the Internet search pioneer is planning to use Google enough to yield hundreds of millions of dollars.
Yahoo, for example, expects to receive $800 million in revenue from the deal in its first year and another bit of operating cash flow to the tune of $250 million to $450 million in the same period.
It's clear the deal has rankled more than a few. A major advertising trade group on Sunday announced it had sent a letter to the DOJ to protest the proposed transaction.
The advertisers worry the deal would diminish competition, increase concentration of market power, limit choices currently available and, as a result, lead to a rise in advertising prices. Microsoft has also weighed in with its opposition to the search advertising deal, as well as
"A bright, seasoned litigator"
While Litvack may lack the high profile of
He caught the attention of John Shenefield, who was head of the DOJ's antitrust unit and was being promoted to associate attorney general.
"He was a bright, seasoned litigator with an enthusiastic personality. And at the DOJ, you have either litigators or academic types, and I felt we needed a litigator," Shenefield said in an interview with CNET News.
Litvack brought a nose-to-the-ground sensibility to a department that had historically been dominated by policy-setters and academics.
"During a Christmas party, there was a skit and the person playing Sandy said, 'fundamentally, I'm a litigator' and everyone in the room knew exactly what he meant," said a source who worked for Litvack. "He liked to litigate. He liked the rough and tumble, whereas some people who had served in that position liked to dot all the I's and cross all the T's."
The antitrust unit, while experienced with analyzing cases, is far weaker on preparing a case for litigation and presenting at trial, said former DOJ attorneys. It needed someone like Litvack--and it may still if it goes after Google.
"Just having someone on hand like a Sandy or David Boies shows there is a serious issue there and that the parties need to consider their other options," Shenefield added.
Some of those options can include restructuring an agreement to placate regulators, backing away from a transaction altogether, or bracing for a legal fight. It has yet to be seen whether the DOJ will force the issue and how the companies may respond.
During his time at the DOJ, Litvack inherited the
Swimming against the tide
But what Litvack was most known for during his time at the DOJ, say former antitrust attorneys, is swimming against the tide in litigating resale price maintenance cases, even though his predecessors chose not to take up the pursuit and some economists considered such action to be "pro-competitive."
The resale price maintenance laws basically found it unlawful for a manufacturer to have an agreement with a reseller that prohibited them from reselling a product at a higher or lower price than expressly stated in the contract.
"Sandy had an attitude that if is it's the law, I'm a prosecutor, I'll go out and prosecute," said a former antitrust DOJ attorney. Ultimately, the U.S. Supreme Court ruled that such activity was considered legal.
"Sandy should have never pursued it. It was a waste of time," said another former DOJ attorney.
Other former DOJ attorneys, however, were less critical of Litvack's pursuit, characterizing his resale price maintenance fixation as an example of his doggedness.
One of the more significant roles Litvack played at the DOJ, which was not widely known, was his advisory role to U.S. Attorney General Ben Civiletti in the handling of President Carter's brother Billy, Shenefield said.
Civiletti was debating whether to take legal action against Billy Carter, who later admitted to receiving
"Ben Civiletti wanted someone to advise him on whether the allegations, in a litigator's mind, made sense and how he would handle it as a matter of public record," Shenefield recalled. "Ben had been a litigator in private practice too and recognized Sandy's common sense."
After leaving the DOJ in 1981, Litvack returned to private practice until joining the Walt Disney Co. in 1991. While at Disney, where he spent eight years, Litvack first served as general counsel, then corporate operations chief, and finally vice chairman before leaving that post in 2000. After Disney, Litvack returned to private practice, before leaving earlier this month to rejoin the DOJ.
So why would a seasoned litigator who is 72 and on the tail-end of his career consider jumping aboard in what may prove to be a rigorous case should the DOJ ultimately pursue it and Yahoo and Google maintain their resolve and fight it?
"He loved his time at the division. It was fun for him," Shenefield said. "This is recess for him and a way to provide public service...other people raise horses."
(Litvack could not be reached for comment, and the DOJ declined to comment on his hiring.)
Correction July 7 at 7:42 a.m. PDT: This article misstated the name of Jonathan Gleklen's law firm. It is Arnold & Porter.
Nobody, least of all Yahoo and Google, doubted that the two companies' search-advertising deal would escape any antitrust scrutiny.
But now some details are starting to emerge about just what form the Justice Department's investigation of the Yahoo-Google deal will take. The agency is expected to send civil investigative demands, or CIDs, within the next week not just to the two Internet powers, but also to competitors, advertisers, and potential partners.
At this stage, there are more uncertainties than certainties. But here are some answers to try to help get a handle on the situation.
Q: What is a CID, anyway?
A civil investigative demand lets the Justice Department compel companies or others to share information for an investigation. It's comparable to a subpoena in a criminal case, though it is reserved for civil cases.
Q: What could the DOJ investigation lead to?
It could be anything from no action at all to a lawsuit. In between is the possibility for discussions with the companies to modify the deal in some way that would address concerns that it hurts competition. With that route, the companies would sign a consent decree overseen by a court. If it does come to a lawsuit, it's a civil case, so nobody at Yahoo or Google would be going to jail, if they lost the case.
It's an indication that the regulators have moved beyond the preliminary stage, but it's relatively routine for that follow-up phase. "In any investigation, they would seek info not just from the main parties (but also) from people who are affected, such as customers," said Jonathan Gleklen, a partner in the antitrust practice of law firm Arnold & Porter and the editorial chairman of the Antitrust Law Journal.
Q: Should we be surprised the Justice Department is investigating?
No. When Google and Yahoo announced the search-advertising deal, they said they'd wait up to three and a half months for regulators to review the deal before starting the partnership.
"We agreed with the Department of Justice on a voluntary basis to have them review this deal," Yahoo Chief Executive Jerry Yang said when announcing the partnership. So company executives knew that there would be attention, even as they argued that the deal would help, not hurt, competition.
Q: Why are regulators looking at the deal?
Google dominates not just search but, more to the point, the market for the text ads that appear next to search results. It's these ads that, for some searches conducted in the United States and Canada, Yahoo expects Google to supply at times.
Yahoo maintains a lot of control over just what ads Google will supply and when, but it's clear that it expects the deal to be significant; Yahoo expects up to $800 million in new revenue and $250 million to $450 million in incremental cash flow.
Google is No. 2 in the market, with Microsoft third. So one possible concern is that people who bid for search ads will have fewer viable places than Google to place them. Google doesn't set ad prices, but if there's only one place to advertise, advertisers could have to bid higher to ensure that anyone actually sees the ads.
Q: Wow, so Yahoo clearly is handing the reins to Google. Slam-dunk antitrust case, right?
Not so fast. For one thing, Yahoo stands to make a fair amount of money out of this, and that's money that can be invested in search, search advertising, display advertising, and any number of other businesses in which the Internet giant is involved. Yahoo has been losing ground to Google overall, and it's certainly possible that strengthening the company overall could help keep the company healthy so that advertisers have choices. And remember that keeping Yahoo healthy could help it remain competitive against Google in another advertising area: display ads.
Q: How do Yahoo and Google make the case that there's no antitrust problem from their deal?
Google has argued that the online-ad marketplace is broader than just search ads, and that cooperation in one domain between rivals doesn't preclude competition overall, citing as an example of Toyota supplying hybrid motor technology to General Motors.
"Google and Yahoo will continue to be vigorous competitors, and that competition will help fuel innovation that is good for users," Omid Kordestani, Google's senior vice president of global sales and business development, said in a blog post.
Yahoo takes pains to point out that it has control over which Google ads it chooses to display, and when. The company argues that Google's ad system is more effective in producing relevant ads for uncommon searches--the "tail"--while Yahoo's own Panama ad system is competitive for the common "head" searches.
In other words, it's possible that Google-supplied ads won't be displacing those from Yahoo, so advertisers using Google's system would see more placement than before the deal, and Yahoo would make money on searches it previously wouldn't have monetized at all.
Q: Will the Justice Department's investigation hold up the deal?
Not unless Yahoo and Google choose to let it. The companies could start putting Google ads on Yahoo search results tomorrow, if they so chose. Because the deal isn't a merger or acquisition, it doesn't require approval under the Hart-Scott-Rodino Act. "We believe, given that it's a commercial agreement, there's not formal regulatory approval" required, Yang said.
Q: What does the Justice Department have to say about all this?
Not a lot beyond confirming that it's investigating. "We're looking at the proposed transaction...We're conducting a civil investigation," said spokeswoman Gina Talamona. She wouldn't share further details about what sorts of information will be gathered or what timeline the investigation is using.
Q: I don't get it. Yang said there's no regulatory approval required. If he seems so sure, why do regulators think they get a say?
Yahoo and Google might not need DOJ permission to start the deal, but that doesn't mean the DOJ can't step in with some form of antitrust enforcement later. Indeed, the agency often investigates antitrust situations after the conduct under scrutiny has taken place, not before.
"We can look at deals we feel might affect consumers and look at competitive effects," Talamona said.
Q: Will the federal agency have concluded its review by the time Yahoo and Google go live with the deal?
Not likely. "They usually take many months. It's not at all unusual to take six months or more," Gleklen said.
And answering a CID isn't a trivial matter; companies often negotiate what must be produced. "If you send a CID to Sony saying, 'Give me every document about online advertising,' Sony might say, 'That's 30 million pages. We don't want to give that. It's too burdensome.' Then there would be negotiations about the scope of compliance, about whose files will be searched," Gleklen said. "That takes time."
Even when the DOJ has all the information it wants, it takes more time for the department's staff to recommend a course of action, then for the section and later an assistant attorney general--in this case Tom Barnett at present--to approve that course, Gleklen added.
Q: So if Yahoo and Google don't have to wait, and the Justice Department will take longer than three and a half months to investigate, why offer the waiting period at all?
Because Yahoo and Google will be spending a lot of quality time with the department, and antagonizing the regulators has its consequences too. "They are trying to appear to play nice with the regulators," Gleklen said.
Q: What does it mean that the investigation likely will extend beyond three months from now?
It means that the federal agents likely will be scrutinizing not just the deal at its current largely theoretical phase, but also seeing what effect people believe it has. At present, the deal is an SEC filing and a lot of promises, but once it goes into effect, regulators will begin to be able to replace some of the deal's current vagueness with data on actual effects.
"It's going to be very hard for an advertiser to talk about how this alliance affects them, because it's hard to know," Gleklen said. For example, "They don't know how much of the Yahoo display space is going to be dedicated to (Google) ads or what the effect is going to be on pricing."
Even with concrete data, though, the DOJ must enter the speculative domain, trying to assess what the effects will be in the long run.
Q: So is the relevant market here search ads, online ads, or all advertising? How will the DOJ define the market?
The DOJ will decide the scope based on the facts it uncovers in its investigation, Talamona said, but wouldn't share more.
The scope is an interesting point. Microsoft, which has repeatedly raised antitrust concerns about the Google deal, has directed attention at search-ad share, while Google has argued for a broad view. Google's acquisition of DoubleClick earlier this year has given it a much stronger position in display ads, though Yahoo is well ahead.
And the stakes are high: the economic slowdown appears to be hurting the advertising industry, but many believe online advertising will fare better than print and TV ads because it's easier to measure whether an online ad is effective and therefore calculate the return on an advertising investment. So far, though, tracking that effectiveness is much easier with search ads than display ads. Search ads are more tightly tied to specific search terms and not general demographic attributes of a Web site's readers, and unlike with display ads, advertisers pay for the ads only when people click on the search ads, which shows a certain level of interest.
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