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Yahoo! Plummets After Microsoft's Exit

05/05/08 - 02:56 PM EDT

Pia Sarkar

Chervitz says he is not convinced that Yang ever wanted to sell Yahoo! to Microsoft and his views colored how the Sunnyvale, Calif.-based company approached the deal.

"He made it difficult for (Microsoft CEO Steve) Ballmer to come to an agreement and save face with his shareholders," he says.

Now Yahoo! is left to build back the company in the hopes investors will eventually agree that its hardball tactics to avoid a Microsoft merger were the way to go.

One of the options it had come up with as an alternative to Microsoft was outsourcing some of its U.S. search ads to its rival, Google(GOOG - Cramer's Take - Stockpickr). The two companies ran a two-week test but neither has provided details about the results.

Many analysts speculate that Yahoo! has a chance of saving itself by developing a longer-term partnership with Google, which would mean outsourcing even more of its search ads.

Citigroup analyst Mark Mahaney speculated that a Google-Yahoo! deal could fetch $1 billion in cash flow, which could be worth $6 a share for Yahoo!

"The Google deal is a real possibility," says Sanford Bernstein analyst Jeffrey Lindsay, whose firm makes a market in both Yahoo! and Microsoft. "We think that a deal will be done and it will secure Yahoo's future."

By outsourcing its ads, Yahoo! can increase both profit and revenue, then take that money and invest it in areas where it still has a chance against Google, like, for instance, ads on mobile devices, Lindsay says.


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