Last updated: July 31, 2009 12:34 am

Microsoft and Yahoo on defensive

Microsoft and Yahoo were forced to mount a renewed defence of their search alliance on Thursday as Wall Street continued to punish Yahoo’s price over the deal.

“Nobody gets it,” Steve Ballmer, Microsoft’s chief executive officer, complained at the software company’s annual analyst meeting. 

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Pointing to the benefits for Yahoo, he added: “It stuns me that people haven’t figured it out.”

Tim Morse, Yahoo’s chief financial officer, told the Financial Times: “There’s a lot of emotion in the market over the deal. It’s a perfect fit for our strategy.”

The companies were forced on to the defensive as Yahoo’s shares continued to slump yesterday, extending their loss to 15 per cent since the deal was announced on Wednesday. Investors continued to express concerns about the financial and strategic implications of the deal.

Microsoft’s shares have edged up 2 per cent in the same period as Wall Street weighed up its chances of becoming a stronger competitor to Google, despite initial costs that Mr Ballmer said would initially reach a “few hundred million dollars a year”.

Mr Ballmer called the alliance “a little bit complicated”, and claimed this had blinded Wall Street to the powerful benefits for both companies. In an unusual move, the Microsoft boss went to considerable lengths to defend Yahoo’s position in the alliance.

“It’s sort of unbelievable,” Mr Ballmer said of the Yahoo share price plunge.

“I was myself rather surprised by the market reaction. Did they sell their search business? No. They get to keep 88 per cent of the revenues. This is a huge value creator – but nothing got bought and nothing got sold.”

Yahoo’s shares have dropped on unhappiness over the lack of any up-front payment from Microsoft to secure the alliance, despite earlier promises from Carol Bartz, chief executive of Yahoo, that she would only do a deal that involved Yahoo receiving “boatloads of money”.

In her effort to defuse concerns, Ms Bartz told analysts and investors the day before that she had used the “boatloads of money” comment because it was “easier for you guys to understand” than explaining the more complicated relationship that will see Yahoo receive a big share of advertising revenues over the 10-year life of the deal.

Investors have been concerned that Ms Bartz has not laid out a clear strategy for Yahoo after it hands over control of its search technology to Microsoft, or explained how she will use the extra cashflow Yahoo expects in the future from the deal.

Mr Morse said Yahoo shareholders might not have understood that the group will continue to control and improve the way in which results are displayed. Yahoo would invest in that, while Microsoft invests in producing better underlying results, he said.

For example, a search for Yankees slugger Alex Rodriguez might return the standard Microsoft results but also up-to-date batting statistics from Yahoo’s leading sports site and tabloid stories from Yahoo News partners.

That would help draw in new searchers and keep them on Yahoo pages longer, Mr Morse said.

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