Yahoo/Google

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Will it matter if Yahoo is left to its own devices? It seems increasingly unlikely that a deal for Google to take over the running of part of Yahoo’s search business will be done. Google’s furiously independent management will bridle under regulatory oversight while the Department of Justice tends to prefer definitive solutions to those requiring it to supervise ad nauseam. That would leave the company – which spurned an offer of $31 a share from Microsoft earlier this year – facing an advertising downturn, a share price languishing at $13, on top of the problem of low profitability that beset it before the question of strategic actions ever arose.

The Google deal, however, was never the best solution. Even if the long-term problems that handing control of a business to a bigger, more able competitor could have been put to one side, Yahoo would still have had to maintain its own search technology and cost base to satisfy regulators. A similar deal with Microsoft or even outright sale of the search business would allow these costs to be cut out entirely, and so create more value for shareholders. The software group, having dodged the bullet once, can afford to wait.

That potentially leaves Yahoo to bash out a deal with Time Warner for its AOL unit. But structuring a purchase will be difficult. The figure of $10bn was at one point mooted by Time Warner’s management, some distance from what Yahoo could acceptably pay. The logic for a tie-up is aggressive cost cutting – consolidating advertising sales forces and technology – not something for which Yahoo has so far shown great aptitude. Bernstein, meanwhile, calculates that, if a merger with Yahoo forced AOL to abandon its own search deal with Google, the lost revenues – about $300m annually – would offset three-quarters of the synergy benefits. Yahoo’s options are few and unenviable.

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