After Bounce, Microsoft Still Needs An Online Search Answer
Thursday June 12nd, 2008 / 23h46
By Jessica Hodgson Of DOW JONES NEWSWIRES SAN FRANCISCO -(Dow Jones)- Microsoft Corp. (MSFT) shares may rally in the short-term from relief over the collapsed Yahoo Inc. (YHOO) talks - and not having to pay billions for the struggling Internet company - but the software giant still faces long-term questions about its search advertising business. Buying Yahoo, or just its search business, would have given Microsoft scale, seen as key to monetizing web advertising. Although Microsoft has recently launched some initiatives - such as being the default search service on Hewlett-Packard Co. (HPQ) computers and unveiling Cashback Search, which gives customers rebates on items purchased through Microsoft's search tools - they aren't seen as likely to close the gap with Google in the short term. "Microsoft needs to take significant steps to improve its position in the online business for longer term benefits," Heather Bellini, an analyst with UBS, said Thursday. Chief Executive Steve Ballmer has said his ultimate target for the company is to "eventually" derive one quarter of its search revenue from advertising. Microsoft's online business still loses money, and its search of the lucrative Internet search advertising market is shrinking. Nonetheless, Microsoft shares rose 4.1% Thursday to $28.24 as shareholders welcomed Microsoft's decision to back away from what they saw as a value-destructive deal. Yahoo shares, meanwhile, fell 10% to $23.52. "When they first announced the deal the market took Microsoft down by virtually the dollar value of the deal," Joe Rosenberg, chief investment strategist with Loews Corp., a Microsoft stockholder who has opposed the deal from the beginning. Since offering to buy Yahoo, Microsoft shares lost nearly 17%. "Now the deal has rescinded, Microsoft is probably on the way to recovering in value what they lost when they announced this deal. The smartest thing they can do now with the cash available is to spend it on themselves," such as buying back their own shares. Yahoo said Thursday that Microsoft was no longer interested in pursuing a takeover, even at the $33-a-share price it offered last month. Microsoft, meanwhile, offered $35 a share for 16% of Yahoo, according to The Wall Street Journal. Microsoft's rationale for the deal was to improve its Internet advertising business and help close the search gap with Google Inc. (GOOG), the market leader. According to ComScore, Google conducted 61.6% of the searches in April, while Yahoo did 20.4%, and Microsoft was a distant third at 9.1% of searches. Search advertising is still the biggest revenue generator in the Internet economy. While Google's U.S. market share in paid search - the crucial measure of online advertising revenue - grew by 20% in April, both Yahoo and Microsoft lost share, according to ComScore. For many analysts, the Yahoo saga has served to underscore Microsoft's inherent weakness in the Internet space, a problem with no easy answers and no short-term fixes. "We do look favorably on Microsoft's decision to abandon Yahoo," said Andy Miedler, an analyst with Edward Jones. "We felt they were offering too high a price and the level of risk in the acquisition was unacceptably high." "But we think the acquisition talks have raised questions about where growth is going to come from. Microsoft will need a coherent Internet strategy going forward, and we question where this is going to come from." Gartner analyst Andrew Frank says that Microsoft doesn't necessarily need to buy a company to compete. Freed from the distraction of discussions with Yahoo, he says, the company can focus on Internet search innovations. "There's enough growth and enough volatility in this market that the race isn't run," he says. But he added that Microsoft could well look for an alternative acquisition to give it the scale it needs. -By Jessica Hodgson, Dow Jones Newswires; 415-439-6455; jessica.hodgson@dowjones.com
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