Google Has Little to Fear From Microsoft-Yahoo Deal

Analysts say that Google should easily fend off the combined effort of its rivals.

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The agreement comes about two months after Microsoft revamped its much-maligned Live Search tool and relaunched it as Bing, which is already taking market share from Yahoo's search engine and even a bit from Google.

At the same time, Yahoo has a larger network of search advertisers, which are now more accessible to Microsoft.

After full implementation, which the companies anticipate will come about two years after regulatory approval, Yahoo expects the agreement will generate about $500 million in operating income and a savings of about $200 million in capital expenditures. The company also expects to add $275 million to its annual operating cash flow.

According to a filing with the U.S. Securities and Exchange Commission last week, Microsoft will pay Yahoo $50 million per year for three years and hire at least 400 Yahoo employees.

Rebecca Jennings, an analyst at Forrester Research Inc., said the deal should boost Microsoft's share of the U.S. online advertising market to about 30%, up from 8% to 9% today. That would translate to significant dollars, since Jennings projects that the market will grow by about 15% annually and reach about $30 billion by 2014.

Yahoo benefits by no longer needing to invest in its search engine, which was not gaining traction against Google anyway, Jennings said.

But Yahoo's abandonment of its search engine could also be the beginning of the end of Yahoo as an independent company, analysts said.

Jim McGregor, an analyst at In-Stat in Scottsdale, Ariz., suggested that Yahoo will likely merge with Microsoft before the close of the contract period.

"Once you give up a key part of your business, it's hard to regenerate that," McGregor said. "What you do is merge with your partner. And a 10-year deal is kind of unheard of in this industry. They did this as a permanent thing."

Elizabeth Montalbano of the IDG News Service contributed to this story.

Copyright © 2009 IDG Communications, Inc.

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