The road leading to the search deal between Microsoft and Yahoo, finally announced Wednesday, has been long. The possibility that Yahoo might be open to a deal involving its search ad business emerged while Microsoft was in the midst of trying to acquire the company last year.
After Microsoft's initial original Feb. 1 offer of $31 per share, or about $44.6 billion, [b] rumors began to circulate about discussions between Yahoo and Google on a search ad deal, although neither company initially confirmed the talks. But in April last year, Yahoo acknowledged that it would begin a "limited test" of Google's AdSense for Search service to run Google ads in Yahoo's U.S. search engine.
[ For more Microsoft-Yahoo news on InfoWorld, see "Microsoft and Yahoo sign search deal, take on Google" and "Microsoft and Yahoo are said to have reached a deal" ]
When Microsoft dropped its acquisition offer in early May, it cited as one of the main reasons for walking away the possibility that Yahoo could enter into a search ad deal with Google.
Having given up on acquiring all of Yahoo, Microsoft nonetheless attempted to acquire Yahoo's search business at least twice afterwards. In June it offered to pay $1 billion for the search assets and to invest another $8 billion in Yahoo at $35 per share.
The offer called for Microsoft to assume the search operations and R&D expense while returning data back to Yahoo for use in its other, non-search advertising business. The partnership included a three-year guarantee by Microsoft of better financial results than Yahoo's search ad system provided.
Such a combination, Microsoft argued, would offer strong competition to Google, whose stranglehold on the highly lucrative search ad market has been Microsoft's primary motivation in pursuing Yahoo.
Yahoo begged to differ and rejected Microsoft's offer on June 12, saying that selling its search ad business to Microsoft clashed with Yahoo's belief that it needs to own both a search and display ad business, because they are converging.
Later that same day, Yahoo and Google announced a non-exclusive deal for Yahoo to run ads provided by Google on Yahoo's search engine and on some of its Web sites. The deal gave Yahoo control over which search queries would trigger Google ads and over where those ads would appear.
The deal, limited to search inventory in the U.S. and Canada, represented an opportunity for about US$800 million in revenue, Yahoo said. At the end of its first full year of implementation, the deal would generate between $250 million and $450 million in incremental operating cash flow for Yahoo.
The deal also included a disincentive for shareholders to oust the Yahoo board and replace it with new members, something that billionaire investor Carl Icahn had been agitating for at the time.
If such a "change in control" happened within 24 months of signing the deal, Google could terminate the agreement unilaterally and force Yahoo to pay a "termination fee" of as much as $250 million.
Microsoft lost little time leading a chorus of critics objecting to the deal on the grounds that it would hurt competition, drive prices up and reduce options.
Yahoo and Google dismissed the criticism, but they also proactively agreed to hold off on implementing the deal to give the U.S. Department of Justice a chance to review it.
In the meantime, in July Microsoft presented another offer for Yahoo's search business, this time in conjunction with Icahn, who by then had acquired an almost 5 percent stake at Yahoo and was loudly complaining about Yang and the Yahoo board.