Yahoo: Let’s Make a Deal

As Google, Microsoft and other potential suitors continue to explore the idea of buying Yahoo, the question remains: Who would benefit most from such a purchase, and why? 

According to Wharton marketing professor Eric T. Bradlow, co-director of the Wharton Customer Analytics Initiative (WCAI), Google, with its prior acquisition of DoubleClick, “would have a unique opportunity to utilize its in-house technology to monetize Yahoo’s installed base. Revenue on the Internet is still driven by traffic, which is a function of having unique and important content.” DoubleClick, purchased in March 2008, provides ad management and related services for buyers and sellers of digital media advertising.

Google could also bring its recently launched social networking Google+ to Yahoo’s audience of nearly 700 million unique visitors, according to a report in the Wall Street Journal. In addition, Google would benefit from Yahoo’s relationships with content publishers like ABC News.

Kevin Werbach, Wharton professor of legal studies and business ethics, states that while Yahoo’s massive user base makes it valuable as a whole to acquirers, “the user benefits really come from the individual Yahoo offerings that are differentiated or have well-developed communities.”

Google is in talks with private equity investors to buy Yahoo’s core business, while Microsoft plans to invest “several billions of dollars” in loans to potential bid partners and preferred equity in Yahoo, theJournal report says. Yahoo and Microsoft already have a 10-year search partnership signed in 2009, a year after U.S. antitrust regulators frowned on a proposed Google-Yahoo partnership for web search advertising. Chinese Internet firm Alibaba Group Holdings, in which Yahoo has a 40% equity stake, has also shown interest in buying Yahoo, but has not yet made a formal offer.

If Microsoft’s strategy is successful, it may also push to integrate Skype, the Internet communications service it recently bought, into Yahoo, says a New York Times report. Already, Microsoft’s Bing search engine allows Yahoo to sell ads against responses to user queries.

The “basic question,” says Werbach, is whether Yahoo today is more valuable as a whole or in parts. “Any new owner of Yahoo must choose whether to extract as much revenue as it can from the existing platform, or to re-energize Yahoo as a distinct competitor. The second option would be better for Yahoo’s users, but it’s riskier for potential investors.”

Bradlow notes that while Yahoo has struggled in some ways, it has continued to provide content that attracts millions of unique visitors on a daily basis, especially “a very monetizable set of customers.” Yahoo’s visitors “tend to be heavier-than-average buyers of products and services, and provide a valuable audience for targeted advertiser content,” he adds. Yahoo’s news arm reported 81.2 million unique visitors in August, making it the biggest online news site, the Times report said.

Yahoo reportedly sought out potential investors after firing its chief executive, Carol Bartz, in September. Bartz made way for Yahoo CFO Tim Morse to become interim CEO after a study of Yahoo’s assets and performance by independent directors concluded that the company was not performing as well as it could. Yahoo is “still basically playing out the Internet portal model that it pioneered in the 1990s,” Werbach told Knowledge@Wharton Today at the time, adding then that “Morse, or whoever takes over as the permanent CEO, needs to make a major strategic decision: Sell the company or bet big on a big idea.”

Price could be a major sticking point as Yahoo’s suitors cobble together a deal, according to theTimes. “Private equity firms have indicated they are unwilling to pay much more than Yahoo’s current market value of $20 billion, arguing that the stock price already includes the expectation of a sale,” the article says.

Putting the right price tag on Yahoo may be a tough call, but the space it operates in offers advertisers a value they cannot ignore. “What social media has allowed companies to do is listen to customers in real time,” said Bradlow in a recent Knowledge@Wharton interview. “You think about the biggest problem companies have: What is it? It’s customer defection and churn. You know why? Because you spend a huge amount of money on acquisition costs, [but] many customers don’t stay around long enough” to justify that expense.

Knowledge@Wharton