Google's shadow hung over Microsoft-Yahoo deal

In the end, Google played a significant part in the undoing of Microsoft's bid for Yahoo, the latest example of Google's ability to interfere with Microsoft's attempts to boost its online advertising business.

While the main reason Microsoft dropped its bid was a disagreement over price, Google served as the ammunition that Yahoo needed to discourage Microsoft from launching a hostile takeover.

[ For the complete saga of Microsoft's unsuccessful bid to take over Yahoo, check out InfoWorld's special report. ]

At least, that's what Microsoft CEO Steve Ballmer maintains. As outlined in the letter he sent Saturday to his Yahoo counterpart, Jerry Yang, Microsoft discarded the option of a hostile takeover when Yahoo threatened to outsource part of its search advertising to Google.

"We regard with particular concern your apparent planning to respond to a 'hostile' bid by pursuing a new arrangement that would involve or lead to the outsourcing to Google of key paid Internet search terms offered by Yahoo today," Ballmer wrote. "In our view, such an arrangement with the dominant search provider would make an acquisition of Yahoo undesirable to us for a number of reasons."

Google has been a thorn on Microsoft's side for years. It has prompted countless valuable employees to hand Ballmer resignation letters on their way to the fabled Googleplex. It outbid Microsoft for DoubleClick. Not content with humiliating Microsoft in search advertising, Google is brazenly aiming for Microsoft's software business with its line of hosted business applications.

It's fair to assume that Ballmer's hatred for the search giant grew this weekend, seeing Google insert itself into the picture and make itself available to Yahoo as a potential spoiler of the deal.

In his letter to Yang, Ballmer said a tie-up with Google would "fundamentally undermine Yahoo's own strategy and long-term viability" by pushing more customers toward Google's advertising platform.

Yahoo, of course, would not see an advertising deal with Google as the corporate suicide that Ballmer makes it out to be.

The company declined to comment about Ballmer's characterization of the Google deal, but a source familiar with Yahoo's plans said the company did not use it as a way to repel Microsoft.

"The commercial agreement was always something that the board of directors had considered as a way to monetize the search business," said the person, who asked for anonymity. A deal to outsource part of Yahoo's search ad business to Google is still on the table, and could be announced next week, the person said.

But while the deal would yield benefits in the short term, the longer-term consequences of a Google tie-up could be disastrous for Yahoo, and Ballmer spends much of his letter arguing that would be the case.