Yahoo-Google Search Deal Could Have HUGE Implications

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Yahoo (YHOO) stock fell 5% on Wednesday after reporting earnings that missed expectations by a rather wide margin. However, that stock loss would have probably been worse had it not been for a Yahoo search deal with advertising juggernaut Alphabet (GOOG, GOOGL) that could have huge implications down the road.

yhoo-googl-alibabaThe deal covers both mobile and PC, and allows Yahoo to send search queries made on its sites or app to GOOGL.

In other words, Google will provide YHOO with Web and image search results along with search advertisements across all Yahoo search businesses. Yahoo will then receive a percentage of Google’s AdSense revenue created from Yahoo search.

The rewards may seem insignificant for Yahoo, but for a company whose search business has been less than stellar, they might be just what the company needed. First off, YHOO has a search agreement with Microsoft (MSFT) dating back to 2009 where Yahoo provides much of Bing’s search traffic.

While Bing revenue rose more than 20% during Mcirosoft’s latest quarter, YHOO has struggled mightily to grow from this partnership. That difficulty likely played a big role in why Yahoo and MSFT restructured the deal back in April, where Yahoo reportedly took a smaller revenue share in exchange for non-exclusivity. And that’s where GOOGL came in.

By partnering with Google, a company that Yahoo CEO Marissa Meyer is very familiar with, Yahoo search will gain access to the search result technology that has yielded GOOGL with a near 64% share of desktop search and more than 88% of mobile/tablet search.

Yahoo search will now gain access to the most lucrative internet search advertising platform, which will hopefully drive Yahoo search revenue higher. Notably, after adjusting for traffic costs, Yahoo search revenue fell 13% to $390 million in its last quarter despite an 8% increase in Display advertisements sold.

All things considered, YHOO will roll out Google-powered search results and ads immediately on its global platforms, but has said that it will wait in the U.S. for the Department of Justice to approve this deal. This might be the most interesting part of the entire deal, Yahoo and GOOGL wanting to wait and make sure that regulator support their partnership before moving forward.

Something Bigger Brewing Between YHOO and GOOGL

If Yahoo gets an OK from regulators, it could set up a acquisition by Google that creates an internet search powerhouse. Combined, Google and Yahoo search owns 76.5% of desktop market share and more than 95% on mobile. So if GOOGL were to acquire Yahoo, it would dominate the U.S. search and advertising markets as well as content hosting. The big question is whether regulators would give Google this much control — and we should learn very soon.

In the event that the DOJ approves Yahoo and Google’s partnership, investors should not be surprised to see a merger after YHOO divests its Alibaba (BABA) holdings.

YHOO’s current market capitalization of nearly $30 billion would be a lot for GOOGL to pay. However, as explained in a previous article, YHOO’s valuation after the BABA spinoff will be closer to $5 billion.

With YHOO having $6.8 billion in cash, a 35% stake in Yahoo Japan valued at $9 billion, and an existing core business that includes internet search, content hosting, and original content, Google would be wise to purchase Yahoo. In essence, GOOGL could probably purchase YHOO at cash value and get its Yahoo Japan stake and core business for free!

When you stop and consider the components of YHOO and its underlying value post-Alibaba, there’s a good chance that there’s more than meets the eye with the GOOGL partnership.

As of this writing, Brian Nichols was long Alibaba and Yahoo.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/yahoo-search-deal-googl-big-implications-road/.

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