- The Washington Times - Tuesday, May 6, 2008

Shares of Yahoo Inc. plunged 15 percent yesterday as investors censured the slumping Internet firm for not accepting a $47.5 billion bid from Microsoft Corp., which scrapped the proposal over the weekend.

Shares of the Sunnyvale, Calif., company closed down $4.30 at $24.37 on the Nasdaq Stock Market. Meanwhile, shares of Redmond, Wash.-based Microsoft slipped half a percent to $29.08 and shares of Google Inc. gained 2 percent to close at $594.90.

Wall Street analysts were skeptical of Yahoo’s chances for a turnaround without the Microsoft deal. Several lowered their ratings of the company.

As for the “now what” question, Yahoo Chief Executive Officer Jerry Yang said the collapse of the Microsoft deal allows the firm to “focus our energy on growing our industry leadership and maximizing value for stockholders.”

“We’ll continue to execute on our plan — making your Internet experience as personal, relevant, open and social as possible, serving advertisers so well they insist on working with us, and opening up Yahoo in a way that developers dream of,” he wrote on the company blog late Sunday, one day after Microsoft withdrew its offer. “And, we’ll also continue to pursue strategic opportunities that position us for long-term success.”

The company recently tested Google’s search advertising technology and many are expecting Yahoo to announce some kind of partnership with the Mountain View, Calif., company in the near future.

Mark S. Mahaney, a Citigroup equity analyst, laid out three possible scenarios for Yahoo. First, he estimated there is a 45 percent chance the company will go “back to business as usual.” Second, the company could announce a “major strategic alternative” in the form of a partnership with Google, AOL or MySpace, which he gives a 40 percent likelihood.

Or, there’s a 15 percent chance Microsoft comes back to the table, said Mr. Mahaney, who downgraded Yahoo to “sell.”

Walter Pritchard, an analyst with Cowen & Co., said he doubts Microsoft’s withdrawal was a mere negotiating tactic.

“Microsoft is far enough behind in [its online services business] that it needs to commit to a strategy and waiting on a Yahoo acquisition simply puts the company further behind,” Mr. Pritchard said in a research note.

Online search and advertising leader Google remains the biggest threat to both Microsoft and Yahoo, according to analysts.

“This is all about Microsoft versus Google for platform dominance, and all the other Internet and media players are pieces in that game,” said David Card, an analyst with Jupiter Research, in a blog posting. “Google has replaced Microsoft as the most important company in all of IT.”

Microsoft needs to step up its hiring, acquire “smaller but more innovative Internet companies” and be aggressive in inking advertising deals, Mr. Pritchard said. Partnerships with AOL, Facebook or MySpace could help the software giant challenge Google’s search dominance, Mr. Card suggested.

“Of course, Yahoo needs a strategy for competing with Google, too,” he said. “Yahoo needs to prove to its content and communications users that its own search is better than clicking away to Google.com.”

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