Updated from Wednesday, Nov. 5SAN FRANCISCO -- Google's ( GOOG - Get Report) decision to quit an online search ad deal with Yahoo! ( YHOO) could open up another takeover attempt by Microsoft ( MSFT - Get Report). Yahoo! CEO Jerry Yang said late Wednesday he's ready to return to the bargaining table with Microsoft ( MSFT - Get Report) if Microsoft remains interested in buying the Internet company, the Associated Press reports. "To this day, I believe the best thing for Microsoft to do is to buy Yahoo," Yang said Wednesday at the Web 2.0 summit in San Francisco, the AP reports. Yang said he and the rest of Yahoo!'s board "remain open to everything" after Google abandoned the ad-search deal. Google said Wednesday that after four months of review by the Department of Justice -- and despite revisions to the deal's terms -- "it's clear that government regulators and some advertisers continue to have concerns about the agreement." "Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners," wrote Google's legal officer David Drummond on the company's blog. "That wouldn't have been in the long-term interests of Google or our users, so we have decided to end the agreement." The Justice Department acknowledged that it had planned to challenge the deal on antitrust grounds, claiming that under the arrangement, both Google and Yahoo! would account for 90% of the search advertising market. "The arrangement likely would have denied consumers the benefits of competition -- lower prices, better service and greater innovation," said Thomas Barnett, assistant attorney general in charge of the Justice Department's antitrust division, in a statement. Yahoo!, which in June entered into the search deal as a way to avert a merger with Microsoft, expressed disappointment in the decision. "Yahoo! continues to believe in the benefits of the agreement and is disappointed that Google elected to withdraw from the agreement rather than defend it in court," the company said in a statement. At the same time, the troubled Internet company put on a brave face, asserting that there is still hope for a turnaround.
"While the implementation of the services agreement with Google would have enabled Yahoo! to accelerate its investments in its top business priorities through an infusion of additional operating cash flow, this deal was incremental to Yahoo!'s product roadmap and does not change Yahoo!'s commitment to innovation and growth in search." Yahoo! had estimated the search deal would result in about $250 million to $450 million in incremental operating cash flow in its first year, with the potential to generate about $800 million in annual revenue. Now all eyes are back on Microsoft, considered by many as Yahoo!'s last hope. Indeed, Yahoo!'s stock was climbing almost 6% to $14.15 in recent trading -- its highest level in a month -- on rumors that Microsoft would swoop in and make another bid. If true, Microsoft would face a vastly different landscape from earlier this year, when it offered $33 a share for Yahoo!. Back then, Yahoo! accused Microsoft of undervaluing its assets but now it seems highly unlikely that another proposal would come anywhere close to the original bid. Echoing his previous public comments, Yang said late Wednesday he believes a compromise on the sales price could have been reached if Microsoft hadn't ended the talks so abruptly, according to the AP. Last month, investor Mithras Capital, which owns 1.9 million shares of Yahoo!, suggested a price of $22 a share but recent speculation puts the number closer to $19 or $20 a share. Chris Boova, an investment officer at J. & W. Seligman, says that at one point, Yahoo! had considered an arrangement with Google to be a much better alternative to a Microsoft merger. But now it may be time for the company to take another look.
"If I were Yahoo!, I would ask myself would this deal now make sense?" Boova says. Sanford Bernstein analyst Jeffrey Lindsay says the agreement with Google had been one of two best shots for Yahoo! -- the other being a possible merger with Time Warner's ( TMX) AOL division. But now, neither of those options is likely to happen. "Without the Yahoo!-Google deal, there aren't enough synergies in a Yahoo!-AOL combined entity to reach Time Warner's asking price," Lindsay wrote in a recent report. For Google, a search deal with Yahoo! had never been considered a huge money maker but more of a strategic decision to block a combination between Microsoft and Yahoo!, which would conceivably be more competitive in search as a combined entity. Google maintains about 63% of the search business, compared to about 8.5% for Microsoft and about 20% for Yahoo!. Lindsay estimates that Google would have generated only about $50 million a year in revenue from the search deal with Yahoo!. That's nothing compared to the legal costs it would have incurred to fend off a challenge from the Justice Department, not to mention the deep scrutiny of its business practices. Boova says that a merger between Yahoo! and Microsoft will still be subject to regulatory review, but it will be less vulnerable than a deal with Google, given Google's domination over its competitors. "A combination with Google and anyone else is going to draw the most scrutiny," he says. Boova maintains that Microsoft must have had confidence that a merger with Yahoo! would hold up, otherwise it wouldn't have taken a chance in the first place.
But, he adds, "Arguably, Google did too and that didn't work out so well, did it?"