Yahoo's search advertising deal with Google, which is expected to increase the company's ability to monetize its Web pages, has been delayed to give the Department of Justice more time to evaluate it. This Google-Yahoo partnership has raised hackles from Microsoft as well as others, but the larger question is what happens to if the deal doesn't happen.
For now, few analysts are betting that Google and Yahoo won't partner. Under the deal, Yahoo can use Google's search ad system when the rates are better. In theory, Yahoo can monetize its sites better. The problem: Google gets more of the search market and that has regulators worried. Google and Yahoo do the full court press on why the deal makes sense to no avail.
The delay of the Google ad pack comes at a tricky time for Yahoo. On Oct. 21 Yahoo reports its third quarter earnings and Wall Street is expecting the worst. More worrisome is the outlook for the fourth quarter. Meanwhile, 2009 targets are in question given that this Google ad deal can't get going. And this chart isn't getting better:
Richard Koman: Sen. Kohl: Justice should look closely at Yagoogle dealMerrill Lynch analyst Justin Post handicaps the situation in a research note. The key themes:
- The Google deal is expected to roughly add 6 to 8 cents a share to Yahoo's 2009 earnings;
- The Google ad pact may have been at least partially delayed to get Yahoo's systems ready;
- The Department of Justice will ultimately approve the Google deal because derailing it could leave Yahoo--the second largest search player--materially weaker;
- If the Yahoo-Google deal fails, guess who enters the picture again? You got it--Microsoft. Post thinks Yahoo shares are worth $24 a share with Microsoft bidding, $19 with a Google deal and $15 if Jerry Yang & Co. continues to fly solo.
As for those Time Warner talks, Bernstein analyst Jeffrey Lindsay notes that a Yahoo-AOL deal seems unlikely. Why? An AOL deal would dilute Yahoo shares and Time Warner wants more than Yahoo wants to pay.
For now, Google looks like Yahoo's best and only realistic option. Post writes:
Despite heavy lobbying by Microsoft and a few advertiser groups, we doubt that the DoJ will ultimately stop the deal given that it was structured to be controllable by Yahoo! and will help Yahoo be stronger financially. Yahoo needs a search deal to help drive growth in 2009 as the company is faced with a weakening macro environment for advertising, particularly in financial services and autos where the company has historically been over-indexed.
That final point about relying on auto and financial services advertising puts a little more urgency on the Google pact. For instance, Yahoo may need the Google deal just to buffer what's likely to be a lower-than-expected outlook for the fourth quarter into 2009.
Also see: Yahoo formally launches its ad network