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Yang passes to Google, swerving past a bamboozled Microsoft. Google slams the ball into the net. Yahoo’s shareholders watch from the sidelines in horror.

Having knocked back Microsoft’s $33 per share cash and stock offer, Jerry Yang has concluded a separate deal to outsource part of Yahoo’s paid search business to Google. In purely strategic terms, the Chief Yahoo’s move makes sense. In accepting that Google’s lead in paid search is too wide to close and instead leveraging Yahoo’s strong brand to cash in on Google’s technology, a partnership, in theory, frees the company to focus elsewhere.

The problem is the timing. A year ago, Yahoo’s stock traded at $27, without any takeover premium and no sense of desperation surrounding the management. Sanford Bernstein estimates that a full outsourcing deal with Google – not just the partial North American one just announced – could have added $9 to Yahoo’s share price. Now, aware that Microsoft will stoke antitrust concerns, Yahoo must plump for a limited version with no synergies, since it must preserve its inhouse search capabilities to maintain the impression that it remains a decent competitor to Google. Bernstein estimates this deal could add $3 to Yahoo’s share price, languishing currently at $22.

One saving grace is that, for all its professed indifference, Microsoft still needs Yahoo. At $33 per share, and assuming it was still offering half in cash, Microsoft was prepared to put almost $23bn of cash into Yahoo’s shareholders’ pockets. Conceivably, it could now revert to its original $31 bid – one reason why its own shares rose 3 per cent on Friday. If Microsoft raised the cash component to two-thirds – only marginally gearing its balance sheet – the added certainty of more cash in hand should tempt Yahoo’s shareholders. With Carl Icahn still on the field, Mr Yang may still be forced into extra time.

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