Merged Microsoft-Yahoo Would Still Struggle Vs. Google

This article was in the IBD , 

A pairing of Microsoft and Yahoo looks more inevitable, but a merger of the two of the Web’s top portals still might not be enough to challenge Google in the online ad market.

Analysts say the Yahoo-Microsoft deal is far more likely to happen than not — even with as reports surface that News Corp. (NYSE:NWS – News) is in discussions about acquiring a 20% stake in Yahoo (NasdaqGS:YHOO – News) in exchange for social networking king MySpace.com and other News Corp.-owned Web properties.

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Yahoo on Monday rejected Microsoft’s (NasdaqGS:MSFT – News) $44.6 billion bid to acquire the company. But it left the door open for negotiations. Microsoft’s offer of 31 a share was a 62% premium above Yahoo’s share price on Feb. 1, when it announced the proposal.

The Better Deal?

A merged Yahoo-Microsoft company is a far better value for Yahoo investors and the future of its operations than allowing News Corp. to buy a smaller piece, says Youssef Squali, analyst for Jefferies & Co.

“From a shareholder perspective News Corp. is offering a very convoluted deal that’s not going to get the type of reception on the street that a clean cash and stock takeout from Microsoft would get,” he said.

Yahoo could also be using talks with News Corp. to force Microsoft to sweeten its offer, says Shahid Khan, partner with IBB Consulting Group.

“Any discussions like the News Corp. discussions will raise the price,” he said. “Microsoft is going to do whatever it takes to get the deal done.”

Microsoft is eager to merge with Yahoo to better take on Google, the Web’s No. 1 search service.

Google handles more than half of the Web’s searches in the U.S. It also is the leader in paid search, the fastest-growing segment of the multibillion dollar online ad market.

Google gets about 98% of its revenue from serving text-based paid search ads that appear near search results.

Sales Soar

In the fourth quarter, Google’s revenue jumped 51% to $4.83 billion vs. the year-ago period. Yahoo posted fourth-quarter revenue of $1.83 billion, up 7.6% from a year ago.

Both companies are profitable.

Microsoft isn’t nearly as successful online. The company reported a loss of $745 million from its online operations last year on sales of $2.47 billion.

Yahoo and Microsoft have competing search services, both of which rank far behind Google.

In December, Google handled 5.6 million search queries in the U.S., up 30% from a year ago, says research firm comScore Networks. Yahoo ranked No. 2 with 2.2 million searches, down 4%. Microsoft came in third with 940,000 searches, up 8%.

Likewise, Yahoo’s paid search service, known as Panama, and Microsoft’s adCenter business don’t generate nearly as much revenue as Google.

Merging the two services could be a problem, says David Hallerman, senior analyst for research firm eMarketer.

“Its going to be hard to blend those two together,” he said. “It could be a scenario where it winds up helping Google more if the paid search for Microsoft and Yahoo isn’t as strong as people expect from a combined Panama and adCenter arrangement.”

Google has become a household name by providing quick and reliable answers to search queries.

Combining Microsoft and Yahoo probably isn’t going to woo consumers away from Google, says Kevin Lee, executive chairman of Didit, a marketing services firm that helps customers advertise online.

“If you buy Yahoo, then you just get what traffic they had,” he said. “Google has been slowly but steadily gaining share from Yahoo, so the question becomes whether a combined Microsoft-Yahoo entity can get that (search) number higher.

Yahoo and Microsoft get the bulk of their ad revenue from sale of graphical online display ads, the second fastest growing segment of the online ad market.

Yahoo had 18.8% share of the online display ad market in the U.S. in November, more than any other company, according to comScore. Microsoft had a 6.7% share.

Google’s Weakness

Google is working on getting into the online display ad market, but that effort has stalled.

The company’s planned acquisition of DoubleClick, a large display ad services company, is still under regulatory review.

Microsoft and Yahoo offer several services such as finance, real estate, movies and shopping to help advertisers reach specific audiences.

Yahoo’s recent acquisitions of BlueLithium, a company that helps advertisers reach targeted audiences, and Right Media, an online ad exchange service, could also help boost the pair’s share of the online display market, says eMarketer’s Hallerman.

“They could offer advertisers and agencies a one-stop shop to reach a massive audience and that’s an area that is a much bigger threat to Google,” he said.

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I totally agree with this article because as an internet marketing consultant i still see that google still holds the upper hand and it will take much work to have any comparison with google Chris Maddaloni is an Internet Marketing Consultant for http://www.advernation.com a New York City based Internet Marketing Company serving businesses in Manhattan, Brooklyn, Queens, Staten Island, The Bronx, Long Island and Westchester. He has helped websites with SEO (Search Engine Optimization) getting them exposure on the first page of top search engines using organic methods. He has a blog at http://www.advernation.wordpress.com and http://www.advernation.blogspot.com