Shares Of Yahoo Drop On Ending Microsoft Talks, Signing Advertising Deal With Google

Friday, June 13, 2008; Posted: 11:42 AM

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Yahoo stock dropped nearly 6 percent, easing $1.34 by 10:25 am Eastern Time to $22.18 a share. Shares of the Sunnyvale, California-based company extended steep losses occurred on Thursday and declined to their lowest level since late January.

As was widely anticipated, Yahoo said late Thursday that it reached a non-exclusive agreement with Google that will enhance its ability to compete in the converging search and display marketplace and to achieve its goal to grow operating cash flow significantly. Financial terms between the two companies were not disclosed.

Under the agreement, Yahoo can run ads supplied by Google alongside its own search results and on some of its web properties in the United States and Canada. Yahoo will select the search term queries for which and the pages on which it may offer Google paid search results. The deal applies only to paid search and content match and does not apply to algorithmic search.

The agreement between the two Internet behemoths came hours after Yahoo said that its talks with Microsoft ended without reaching any merger or partnership deal.

When news broke that talks had ended between the two firms without a deal on Thursday, shares of Yahoo experienced a selling spree. The stock fetched $25.97 at 1:00 p.m. Eastern Time before slumping as low as $22.50 during late afternoon trading.

Yahoo has been engaged in talks with Microsoft over a number of deal alternatives ever since the Redmond, Washington-based software giant dropped its initial acquisition bid for the troubled Internet company in May.

In a meeting on June 8, Microsoft representatives said unequivocally that the company was not interested in pursuing an acquisition of all of Yahoo, even at the price range it had previously offered.

Yahoo's board also rejected Microsoft's proposal to acquire Yahoo's search business alone, saying it would not be in the best interests of Yahoo stockholders, as it would leave the company without an independent search business that it views as critical to its strategic future.

Microsoft abandoned its sweetened $47.5 billion offer for Yahoo in May after negotiations between Yahoo CEO Jerry Yang and Microsoft Chief Executive Officer Steve Ballmer failed. The software giant had launched a hostile offer originally worth $44.6 billion at the end of January. Yahoo rejected the offer, saying it was inadequate.

Aggrieved at this, billionaire investor Carl Icahn, who owns about 10 million shares of Yahoo and options to acquire another 49 million shares, said last month he was gearing up for a proxy fight with the Yahoo board. In an open letter to the company, Icahn accused Yahoo's board of directors of "acting irrationally" in rejecting Microsoft's $47.5 billion buyout offer. He even received approval from the Federal Trade Commission for the purchase of $2.5 billion worth additional Yahoo shares.

Icahn's angst over Yahoo not being able to broker a deal with Microsoft led him to send letters to Yahoo's Board demanding a shake up in the company's top-level management, including Yang's removal.

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