Pia Sarkar
SAN FRANCISCO - Things just got a whole lot more complicated for Yahoo!(YHOO Quote - Cramer on YHOO - Stock Picks).
Now that it has spurned Microsoft's attempt to acquire its search business, the Internet giant finds itself in the hands of its biggest competitor, making it much more difficult to gain any ground in the lucrative search business, where it already lags behind. Yahoo! has agreed to outsource some of its online ads in the U.S. and Canada to Google(GOOG Quote - Cramer on GOOG - Stock Picks), which to analyst Jeetil Patel at Deutsche Bank is essentially an admission that it cannot keep up in a market where it had once thrived. In his research note on Friday, Patel called the deal with Google "perhaps one of the worst strategic maneuvers seen in the Internet industry." "This effectively signals the end of Yahoo!'s competitive entry in the paid search business and signals to advertiser/agency customers to simply work with Google to purchase ad impressions from Yahoo! longer term," he wrote. "Net/net, we don't understand this deal, and expect Yahoo! shares to trade lower due to its strategic implications." At the same time, Darren Chervitz, director of the Jacob Internet Fund, says that if Yahoo! had sold off the search business to Microsoft as Microsoft had wanted, it would have been like waving a white flag. By outsourcing to Google, the company might still have a fighting chance. "If they were going to lose market share anyway, this gives them one last shot to see if there's a middle ground," says Chervitz, whose fund owns 100,000 shares of Yahoo!.
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