Wall Street Underwhelmed By Yahoo!'s (YHOO) Search Deal With Microsoft (MSFT)

After months and months of speculation, Yahoo! (Nasdaq: YHOO) and Microsoft (Nasdaq: MSFT) announced their search partnership deal this morning. Under the deal, Microsoft's Bing will power Yahoo! search and Microsoft will pay Yahoo! 88% of the search revenue generated. With no upfront payment, Yahoo! investors have greeted the news harshly --- sending the stock down 11%.

The partnership is a direct challenge to search leader Google (Nasdaq: GOOG), which dominates the search landscape.

Yahoo!'s CEO Carol Bartz, who originally said Microsoft would have to pay boatloads to buy its search business, said the "agreement comes with boatloads of value for Yahoo!"

Some key terms of the deal are: 10 year term; MSFT's Bing will power the search technologies at Yahoo!; Yahoo! will become the exclusive worldwide relationship sales force for both companies' premium search advertisers; each company will maintain its own separate display advertising business and sales force; Microsoft will pay traffic acquisition costs (TAC) to Yahoo! at an initial rate of 88% of search revenue generated on Yahoo!'s O&O sites during the first five years of the agreement; Microsoft will guarantee Yahoo!'s O&O revenue per search (RPS) in each country for the first 18 months.

While no cash traded hands, Yahoo! estimates the agreement will provide a benefit to annual GAAP operating income of approximately $500 million and capital expenditure savings of approximately $200 million. Yahoo! also estimates that this agreement will provide a benefit to annual operating cash flow of approximately $275 million.

Yahoo! sees full implementation in 24 months, following regulatory approval in early 2010.

Analysts are using such terms as "underwhelming" to describe today's deal. FBR Capital said, The lack of an up-front payment, no minimum revenue guarantee, and a revenue share that, while above average, is slightly below the +90% that larger deals command make for a lackluster deal for Yahoo!, in our opinion. The firm also said the lack of any display component to the deal also seems like a missed opportunity for Yahoo!. On the other hand, the firm said the deal is a positive for Microsoft.

Bechmark analysts also said the deal was disappointing, citing three things: 1) no upfront payment to Yahoo (as much as $3 billion expected); 2) Yahoo net savings of $275 million is lower than expected ($500-$750 million); and, 3) Yahoo's revenue share is low at 88% compared with an expectation of as much as 100% initially.

Analysts at Piper Jaffray were more constructive, saying while the deal was not as sweet as they had expected it is the right move long-term as it will allow Yahoo! to focus on the key to its success: content. The firm is reiterating their Buy rating and $20 price target on Yahoo!

Real-Time Market Moving News Two-Weeks FREE http://www.streetinsider.com/premium_content.php

You May Also Be Interested In

• Citi upgrades O-I Glass to Buy with $9 price target, opens 90-Day upside catalyst watch
• Robo.ai names Hao Wang of Changer.ae to its board of directors
• Royal Caribbean completes $1.25B senior unsecured notes offering