Google panicked, Yahoo to nag and Microsoft to borrow

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Feb 05 2008
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Yahoo might hates Microsoft and Microsoft in turns hates Google but Google hates Microsoft even more. Looks like a love (or rather hate) triangle relationship, don’t you think? In theory if Microsoft were to leave Google alone without putting a stick between Google’s legs everything would be calm. Microsoft would continue dominating the personal computers’ operating system and Google will continue to make tons of money from its domination in the search engine. Yahoo, on the other hand will continue to rot the way it is rotting now.

But Microsoft couldn’t close its eyes and pretend Google will not overtake it as the next new Microsoft, only this time Google might makes multiple times of money from online advertising compared to what Microsoft did to personal computers in 1980s and 1990s. As with any other business it’s good to have a loser next to you, in this case Yahoo, as without a loser people will not know how great you are. And so Google continued to succeed while Yahoo continued to rot and each time Yahoo missed its earnings, investors rejoice by buying Google’s stock or Call Options (you did, didn’t you?) – until now.

Google’s Fear and Strategy

When Microsoft Corp. (Nasdaq: MSFT, stock) suddenly announced its $44.6 billion bid for Yahoo Inc. (Nasdaq: YHOO, stock), Google somehow panicked. Almost instantly, Google called Yahoo with offer of a partnership – Yahoo outsourcing its search to Google and split the profit. Right, suddenly Google becomes good friend of Yahoo. Some of you might think Google should still be able to smile as Google still commands 60 percent while a new Microsoft-Yahoo is still at a distance 30% of the market share. What really scare the shit out of Google is the potential of Microsoft-Yahoo’s in the vertical advertising network – a huge threat to Google’s Adsense.

From Google’s 2007 revenue of $16.6 billion, about 10 percent or $1.64 billion of Adsense revenue was generated by Google Network sites. Google missed its earnings forecast last week primarily due to weakness in its AdSense program – poor click-through from MySpace despite its guarantee of $900 million to News Corp. Microsoft and Yahoo’s financial portal, MSN Money and Yahoo! Finance respectively, are the two top financial sites. If Microsoft-Yahoo decides to sell ads to smaller publishers (ahem, such as FinanceTwitter) besides their vertical sites, most publishers would potentially switch to them instead of Adsense.

At the same time Google Inc. (Nasdaq:
GOOG, stock) has begun to lay the groundwork to try to delay but definitely not to stop the Microsoft-Yahoo deal, not that Google can in the first place. It’s more of a payback for Google since Microsoft did almost the same thing when the former acquired DoubleClick for $3.1 billion in Apr 2007. Google cannot simply protest from the online advertising monopoly but it sure can argue about Microsoft-Yahoo! monopoly in the instant messaging (IM) and web-based email market share.

Yahoo is in Microsoft’s bag literally

However Microsoft has the upper hand in the sense that a combined Microsoft-Yahoo could create better competition (and stronger competitor) to Google’s current monopoly in internet advertising and search business. Antitrust experts say any review is likely to be lengthy, given the overlap in Microsoft’s and Yahoo’s businesses, but ultimately decided in Microsoft’s favor. The only problem would be with the European Commission since Europe has a stricter scrutiny policy.

What could Yahoo do? Yahoo can’t take the company private because to do so would means 4,500 employees (31 percent of its workforce) need to be sent packing besides selling $12.5 billion worth of other investment such as Alibaba.com and Yahoo Japan. Already potential white knights such as News Corp., AT&T Inc. and Comcast Corp. have chickened out from the fight.

Yahoo however can nag for a higher offer price and some analysts already bet that Microsoft could end up paying as much as $35 a share. Microsoft is expected to borrow money to finance the acquisition, the first time the giant ever do so.

How to make money from their stocks

FinanceTwitter wrote that you should short Google Inc.’s stock the moment the news broke, and you should hold on to your profit as everything is pointing to a Google’s stock sell-off. Assuming Yahoo can’t do much except ask for a higher price ($35 a share?) you might want to long Yahoo stock.

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