Kevin Johnson of Microsoft on How and Why Yahoo! blew it for Stockholders and Customers

By most accounts the weekend after, Yahoo! blew a deal with Microsoft in order to prepare to lose a deal with Google, Yahoo!'s death knolls or tolling.

The end may not be this year or next, but given their inability to do business when and where they needed to and their penchant for doing business where they absolutely do not need to, they will soon be another internet company footnote like the implosion of AOL.  They will no longer provide search, search advertising, or internet advertising.  They've dropped out of bill payment services and are losing chat ground to other companies.  Soon they will only be good for brand recognition, which might when them some deals with their logo on micro sd cards, but little else.

Here are Kevin Johnson's comments and perspective on the deal and situation that Yahoo! lost on...

During the last few weeks, we spent a considerable amount of time with Yahoo! discussing an alternative proposal around search. Specifically, this search proposal had three components:

• Microsoft would have invested $8 billion in Yahoo! at $35/share;
• Microsoft would have purchased Yahoo!'s search assets for $1 billion, and assumed the operations and R&D expense while returning data back to Yahoo! for use in their advertising business; and
• Microsoft and Yahoo! would have entered into a long-term search partnership, where Microsoft would have provided favorable economics to Yahoo! search, including a three-year guarantee of higher monetization than Yahoo!'s Panama paid search system currently provides.

This partnership would have created a stronger competitor to Google, providing greater choice and innovation for advertisers, publishers and consumers. This approach could have been implemented quickly and would have simplified the integration process for both parties. It would have also established the basis for a long-term Internet partnership between Yahoo! and Microsoft.

We believe this proposal would have created compelling value for Yahoo! and its shareholders in at least three ways:

• New Transfer of Cash to Yahoo! Shareholders. This proposal would have transferred $9 billion from Microsoft to Yahoo!, which could have been used by Yahoo! to reward their shareholders.
• A More Profitable Ongoing Business. This proposal would have resulted in higher operating income on an annual basis for Yahoo!, with our projections more than doubling Yahoo!'s operating income in the first year of operation, and increasing it by more than $1 billion above its current operating income level.
• A More Compelling Search Offering. The combination of the search platforms would have unlocked new R&D innovation, eliminated redundant engineering efforts and allowed for greater scale in serving our customers.

Taken together, we believe that our proposal would have created total value for Yahoo!'s shareholders in excess of $33 per share.

Unfortunately Yahoo! has chosen a different course, and yesterday announced an agreement that would start to consolidate over 90% of the paid search advertising market in Google's hands. This will make the market far less competitive. There are many experts who suggest that a host of legal and regulatory problems lie ahead for Google and Yahoo!.

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