Yahoo / Microsoft

Let us, for a moment, give Yahoo the benefit of the doubt. Since announcing a long-anticipated internet search partnership with Microsoft last week, Yahoo’s shares have lost 17 per cent, or $4bn in value. Is it possible that the market is missing something?

After all, Yahoo is not outsourcing the entirety of search. Microsoft will crawl the web, invest in technology, supply the data and run the advertising systems. But Yahoo will decide what results to display, and in what form users will see them. Yahoo will also continue to sell search for both companies to premium customers – the big corporate advertisers responsible for most ad spending. As this moves inexorably online, Yahoo will be the one positioned closest to the customer. The partnership will also leave it free to focus on attracting users to its popular websites.

Also, while the terms are not so rich as shareholders had hoped, the cost savings from outsourcing are expected to eventually contribute $275m in incremental cash flow annually. Taxed and capitalised that is worth $1.8bn, or $1.28 per share, but could be conservative given estimates for savings that were mooted in deal discussions last year.

However, this all rests on the assumption that Yahoo does not lose share in the search market to Microsoft’s Bing search engine, as Yahoo is not guaranteed revenues. Meanwhile, Yahoo will bear the cost of selling to premium advertisers for Microsoft, without benefiting when those advertisers spend money through Bing. And Microsoft can take back those premium relationships after five years in return for a lower portion of search revenues. There is also no convincing answer to what happens in a decade when the partnership ends. Perhaps it is wrong to conclude that Yahoo has relinquished a core business cheaply. But it will be years before Yahoo will be able to prove to doubters that this is the case.

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