End of Microsoft Talks Leaves Yahoo! Competitively Challenged, Expensively Priced

6/13 - "I don’t believe that there is anything Yahoo could do at this point to further destroy their business that would surprise me...The deal terms announced with Google appear to be fairly innocent - a non-exclusive arrangement that let’s Yahoo take Google’s ads if and when they choose to, and put them alongside their own ads, and/or other third party ads. But the truth is that this will cause even more advertisers to flee Yahoo’s platform. Which will drive auction-determined ad rates down. Which will drive Yahoo to take more Google ads. Which will…"

"Yahoo’s hatred of Microsoft runs so deep that they were actually, in the end, willing to destroy the future of their company just to keep it independent for a short while longer. They’ve ignored the wishes of their shareholders, employees and many now former key employees in killing that deal. And apart from Google, CEO Jerry Yang, President Sue Decker and possibly Tim O’Reilly, I don’t believe there is anyone in the world that is happy with what has happened."

"The delicate power balance among the big players was disrupted today in a big way, and the consequences will be felt over the coming months and years. We needed a competitive market in search to ensure the health of the Internet. Now, it’s nearly impossible to see how that can happen."

6/13 - "Imran Khan, J.P. Morgan: “We think that Google is the big winner in this deal. We think Google will benefit in 3 key ways: 1) we think Google will gain ~$90M in net revenue from the outsourced Yahoo! search, 2) Google could gain an additional $182M in F09 net revenue through migration of some of Yahoo!’s affiliate network to the Google platform, and 3) Google could get an additional $288M in F09 revenue if RPS [revenue per search] grows 3% from the increased volume. In sum, we think Google could increase its F09 revenue by ~$560M and its EPS by ~$1.31.”

Ross Sander, RBC Capital: “Google investors stand to benefit two-fold from recent announcements from the Yahoo team: 1) the termination of discussions between Yahoo and Microsoft should allow Google`s multiple to expand and 2) more directly, Google could earn up to $700m in incremental annual cash flow once a steady state is reached post-implementation of the announced partnership.”

"Benjamin Schachter, UBS: “We think the deal is clearly beneficial for YHOO in the short-term as it increases cash flow and potentially allows YHOO access to insights into GOOG’s monetization engine that YHOO could mimic. However, the obvious question is - at what long-term cost? While YHOO remains a principle in search and text-based ads, it weakens its position as a text-ad provider for affiliates and potentially drives more advertisers to go directly to GOOG. It also calls into question YHOO’s focus on providing an integrated offering.”

"Jeffrey Lindsay, Bernstein Research: “We think the announced Yahoo!-Google deal is worth only $3/share to Yahoo! shareholders for two reasons: (a) Yahoo! cannot now outsource all of its paid search business to Google because of likely regulatory challenges and (b) Yahoo! cannot now eliminate its own Panama system and achieve cost savings. We think that shareholders may not be satisfied with this outcome and may potentially press for a deal with Microsoft. We think at a minimum that the current deal will result in further lawsuits which Yahoo! will ultimately have to settle, further impacting the economics of the deal.”

6/13 - "Microsoft Corp. (MSFT) was like a coiled spring waiting to pop as soon as the software maker received word that the Yahoo deal was officially dead...The companies have given three months to allow the feds to review the deal, so there is a small window of time if Microsoft does really want to pursue Yahoo, though it’s probably unlikely it does so."

"With the weight of a $44 billion dollar acquisition off its shoulders, Microsoft shares can now trade on the merits, and it’s safe to say that trading at 14x forward earnings is not fair value – that’s why fund managers have been accumulating the stock for quite some time."

6/13 - "Either Yahoo or Google can spike the deal if there’s a “change in control” of the other company. Broad generic definition: Someone else controls 50% or more of its voting securities. But the language is tweaked to account for Microsoft (MSFT), Time Warner (TWX), or News Corp. (NWS): If any of those buyers ends up with 35% of Yahoo, Google can walk away."

"If Microsoft acquires more than 15% of the voting power, 5% of the total equity, or 1% of the company's annual revenues, it's considered a change in control...The escape hatches theoretically apply to both parties, but obviously there's only one practical application here. And to reinforce that, there's this clause: If Yahoo is acquired, Google can receive up to $250 million as a kill fee. That certainly won't be enough to keep Ballmer at bay, though."