Microsoft and Yahoo seal deal

Yahoo ran into a fresh wave of doubts in the financial and technology worlds on Wednesday as it bowed out of the race to compete with Google.

In a deal that caps more than two years of effort by Microsoft to secure a foothold in Yahoo’s search business as a way to challenge Google, Yahoo will hand control of its internet search technology to the software group on terms that fell short of expectations.

Although less drastic than the $48bn acquisition of Yahoo that Microsoft proposed last year, the move would be costly for Microsoft and difficult to implement, but could for the first time make it a credible long-term rival to the search group, according to analysts.

News of the technology alliance brought an abrupt end on Wednesday to the six-month honeymoon that followed the appointment of outsider Carol Bartz as Yahoo’s chief executive. Yahoo shares slumped by 12 per cent as Wall Street expressed doubts about the financial benefits and the long-term impact on the internet media group.

“The market is disappointed, justifiably,” said Larry Haverty, money manger at Gamco, which has 1.6m Yahoo shares. He said Yahoo now resembled a consumer media company such as Time Warner and might not still be independent in five years.

Ms Bartz said that the deal would free Yahoo to focus on its main strengths of media and advertising, while greatly reducing its costs. “If you got the chance to offer the same service at no cost, you’d be crazy as a business leader not to do that,” she said in an interview with the Financial Times.

The focus on display advertising and media, however, drew comparisons with AOL, which has struggled to come up with an effective strategy since the dotcom bust. Ms Bartz has failed so far to explain how Yahoo will stay competitive in the long term, said Allen Weiner, an analyst at Gartner.

Yahoo stockholders were alarmed that it was surrendering its technology position while gaining far less than anticipated annual savings, which had been estimated at as much as $1bn. Ms Bartz, who had earlier promised “boatloads of money” from any deal, said she had given up the idea of an upfront payment in favour of a larger share of future search advertising revenues from Microsoft.

The deal will face intense antitrust scrutiny, since opposition in Washington blocked a proposed Yahoo search deal with Google last year.

Brad Smith, Microsoft’s general counsel, said the deal was the only way to ensure viable competition in the long term, and said he knew of no other case where a company with as great a share as Google had objected to two smaller companies combining forces.

Several advertisers who had complained about a Yahoo-Google tie-up praised the new partnership, saying it would provide a real alternative to Google. “It is very welcome for our clients as it brings more balance to the search marketplace and may moderate pricing,” said Sir Martin Sorrell, chief executive of WPP, the world’s largest advertising agency.

Audio: Richard Waters on the Microsoft / Yahoo deal

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