Microsoft, Yahoo deal was a long time in the making

IDG News Service - It's been a long road to the search deal between Microsoft Corp. and Yahoo Inc. that was finally announced today. 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 original Feb. 1, 2008, offer of $31 per share, or about $44.6 billion, 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.

When Microsoft dropped its acquisition offer in early May 2008, 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 afterward. In June 2008, 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, 2008, 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 nonexclusive 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 $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, which billionaire investor Carl Icahn had been agitating for at the time.