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Look Out – Here Comes Yahoogle!

Well folks, if you have not already heard the news, Microsoft has withdrawn its offer to acquire Yahoo!. Despite having raised its offer by $5 Billion, from $29/Share to $33/Share, Yahoo! still walked away from the deal unless Microsoft would pony-up an additional $5 Billion ($37/Share).

However, what I find makes the collapse of this deal really interesting is that when you read the letter that Microsoft CEO Steve Ballmer sent to Yahoo! CEO Jerry Yang on Saturday, May 3rd while price was certainly deciding factor, the straw that broke the camels back appears to be Yahoo’s decision to further expand their “partnership” with Google. In short, it’s the prospect of having to acquire “Yahoogle!”, not Yahoo! that has really made Microsoft stop its pursuit and not go hostile.

In a letter to Yahoo! CEO Jerry Yang, Microsoft CEO Steve Ballmer stated that “We regard with particular concern your apparent planning to respond to a “hostile” bid by pursuing a new arrangement that would involve or lead to the outsourcing to Google of key paid Internet search terms offered by Yahoo! today. In our view, such an arrangement with the dominant search provider would make an acquisition of Yahoo! undesirable to us for a number of reasons.”

So what would the world according to Yahoogle! look like? Well according to Mr. Ballmer, its one that’s pretty dark in which talent flees, prices increase, the Feds come after you (Microsoft certainly knows about this) and most of all Google becomes an Evil Price Fixing Baron.

But who am I to tell you about Yahoogle!, let Mr. Ballmer be your guide! The following is a summary of why Mr. Ballmer feels that Yahoogle! would make Yahoo! undesirable acquisition for Microsoft:

1. No More Panama
First, Microsoft claims Yahoogle! would fundamentally undermine Yahoo!’s own strategy and long-term viability by encouraging advertisers to use Google as opposed to your Panama paid search system. This would also fragment their search advertising and display advertising strategies and the ecosystem surrounding them. This would undermine the reliance on Yahoo’s display advertising business to fuel future growth.

2. Talent Will Flee
Given this, Yahoogle! would impair Yahoo’s ability to retain the talented engineers working on advertising systems that are important to Microsoft’s interest in a combination of the two companies.

3. Here Come The Feds
In addition, Microsoft claims Yahoogle! would raise a host of regulatory and legal problems that no acquirer, including Microsoft, would want to inherit. Among other things, this would consolidate market share with the already-dominant paid search provider in a manner that would reduce competition and choice in the marketplace.

4. Google Now Sets Every Price
Yahoogle! would also effectively enable Google to set the prices for key search terms on both their own and Yahoo’s search platforms and, in the process, raise prices charged to advertisers on Yahoo. In addition to whatever resulting legal problems, Microsoft feels that this is unwise from a business perspective unless in fact one simply wishes to use this as a vehicle to exit the paid search business in favor of Google.

5. Minimal Prospects for Dating and/or Marriage
Yahoogle! could foreclose any chance of a combination with any other search provider that is not already relying on Google’s search services.

So what do you think? Is Yahoogle! good or bad? Whether you agree with Microsoft or not, the paid search and online advertising landscape is quickly changing and Yahoogle! is certainly going to play role in paving the way.

To read the full text of the letter that Microsoft CEO Steve Ballmer sent to Yahoo! CEO Jerry Yang on Saturday, May 3rd in which they formally withdrew their offer to acquire Yahoo, please click on the on the following URL –
http://www.microsoft.com/presspass/press/2008/may08/05-03letter.mspx

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