Google (GOOG) Extends A Claw To Yahoo! (YHOO)

If Yahoo! (YHOO) wants to remain an independent company, it can always do a deal with the devil–Google (GOOG). According to a number of reports, the largest search company has already approached Yahoo! and offered it help to stay out of the hands of Microsoft.

One alternative for Yahoo! would be to "out-source" its search capacity to its larger rival. Yahoo! would almost certainly make more money. Google’s search technology is better at getting advertisers results. Yahoo! should get a higher yield off its pages with Google driving the back-office. Yahoo! could also lay off a lot of its R&D people.

But, a deal with Google would simply leave Yahoo! as a shell. It would be an internet portal, which seems to be a failing business now that many people go directly to websites without checking in a Yahoo! or AOL first. Yahoo! would also have a network for display ads. That market is the one weak spot in internet advertising.

To put it bluntly, Yahoo! would get the illusion of being public but it would serve Google as its master. All of the leverage in the portal company’s results would come from a relationship with an operation which has beaten it like a red-headed mule.

Bloomberg reports that Yahoo! investors are lining up behind a deal with Microsoft, which has offered to buy Yahoo! for $31 a share. No matter how much Yahoo! management wants to remain independent, it is failing as a public company. It can do a deal with Google and essentially be controlled by its income from the search firm. Or, it can join Microsoft and, at the very least, enjoy a good fight between the two most successful tech companies in the world.

Douglas A. McIntyre