February 26, 2008 / 11:36 PM / 10 years ago

ANALYSIS - Google winner as Microsoft and Yahoo face off

SEATTLE (Reuters) - Neither Microsoft Corp nor Yahoo Inc want to blink first in the software giant’s proposed $41.7 billion takeover of the Web pioneer but as the gamesmanship drags on, archrival Google Inc, the merger’s raison d‘etre, is the biggest beneficiary.

A Google search page is seen through the spectacles of a user in Leicester in this July 20, 2007 file photo. Neither Microsoft Corp nor Yahoo Inc want to blink first in the software giant's proposed $41.7 billion takeover of the Web pioneer but as gamesmanship drags on, archrival Google Inc is the biggest beneficiary. REUTERS/Darren Staples/Files

Not much has progressed since Microsoft offered to buy Yahoo on February 1, a proposal that was rebuffed by Yahoo’s board as undervaluing the company. Microsoft has countered by saying its offer was fair and urged the board to take a second look.

The union of its two biggest Web rivals could eventually loosen Google’s grip on online search and advertising, but a messy takeover battle followed by a complicated integration could give Google ample time to build on its advantage.

“Google benefits if Yahoo is in a state of limbo,” said RBC Capital analyst Jordan Rohan. “The longer the uncertainty persists, the greater lead Google has in online advertising.”

The impasse between Microsoft and Yahoo has lasted almost a full month and while analysts think that the two companies will eventually strike a deal, the stand-off shows no signs of a quick resolution.

Microsoft has not ruled out a proxy fight to win Yahoo and Yahoo continues to probe for other options. A proxy fight could stretch until July, the latest it could hold its annual meeting this year, followed by a strict regulatory review process in the United States and Europe.

After clearing those hurdles, Microsoft and Yahoo will have to merge two different advertising systems and consolidate completely separate back-end computer systems. Already, Microsoft is seeking to absorb its $6 billion purchase of advertising services company aQuantive from mid-2007.

All the while, Microsoft has to figure out how to head off a feared mass exodus of Yahoo employees while paring back redundant brands.

Microsoft expects the Yahoo transaction to close in the second-half of 2008, but analyst Marianne Wolk at Susquehanna Financial Group said a deal may not be finalized until early 2009, meaning that Google may not face a stronger number two in Web search and advertising until 2010.

GOOGLE DOMINANCE

Google has proven what it can do when given an opportunity to build on a lead.

Over the last year, Google’s U.S. Web search market share has jumped 11 percentage points, while Yahoo and Microsoft have both posted steady declines, according to research firm comScore. Factor in Web searches done overseas and Google’s lead is daunting -- with three-quarters of the world market.

Its profitable search engine, allow Google to devote more money toward research and development for growth areas like Web video advertising and search on mobile phones.

Google’s $3.1 billion acquisition of DoubleClick, due for completion later this year, should also shore up its position in display advertising, banner ads placed on Web sites, where it has only begun to make inroads against Yahoo.

Without a clear number two to challenge Google, advertisers and Web site publishers may opt to stick with the status quo.

“In the short term, Google is likely to continue to see renewals and traffic wins as various players realize that because of the merger and the time that could take that neither Microsoft or Yahoo could catch up for some time,” said Susquehanna’s Wolk.

Microsoft and Yahoo, however, will become a “substantial force” in the online market over time, according to Wolk.

At the same time, Google faces its own challenges. Two Wall Street analysts, UBS and BMO Capital, cut stock price targets on Google on Tuesday, citing a comScore report that showed a decline in advertisements delivered by the site in January, even though searches increased in the same period.

Google has raised concerns about a joint Yahoo-Microsoft, saying that coupling the two most often-visited Web portals with Microsoft’s desktop software monopoly could undermine competition.

Mountain View, California-based Google could also see its R&D advantage shrink with a combined Yahoo-Microsoft. Google spends about the same amount of money of Microsoft and Yahoo combined, but as separate entities, there is a lot of overlap in that investment.

“There is a lot of redundant development going on,” Microsoft Chief Research and Strategy Officer Craig Mundie said at Goldman Sachs Tech Investment Symposium. “At the end of the day, you don’t need both.”

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