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Microsoft, Yahoo Deal Fraught With Risk

Shareholders punish Yahoo over pact's terms while pundits say a host of issues could derail alliance.

Investors hammered down Yahoo's stock more than 12% Wednesday on worries that the company's search deal with Microsoft undervalues its technology and will do little to shore up its balance sheet. Looming integration, privacy, and regulatory issues also fueled uneasiness over the deal.

Yahoo shares fell 12.08%, to $15.14, while Microsoft gained 1.41% to close at $23.80.

After months of negotiations, Microsoft and Yahoo unveiled a wide ranging search alliance under which Microsoft's Bing technology will power queries on all of Yahoo's Web properties while Yahoo assumes broad sales responsibilities for both companies' Internet platforms.

Analysts said the arrangement makes sense in theory but could be fraught with practical management and technical obstacles that could steer customers to rival Google.

"The implementation of this deal will not be without its challenges," said Ovum's David Mitchell, in a research note. "There are significant engineering challenges that both companies will need to work through and a substantial change management task to accomplish in implementing the agreement and the vision that it encapsulates," he added.

Indeed, Microsoft and Yahoo said it would take two years for their alliance to become fully operational and that many of its financial and commercial benefits would not be realized until then.

Another area of concern is privacy. By joining forces, Microsoft and Yahoo together will have access to the Web browsing and purchasing histories of millions of Web users—a fact that could draw scrutiny from government watchdogs and consumer advocates. "Microsoft is a lightning rod for attention from governing bodies in both the U.S. and Europe," said Gartner analyst Allen Weiner.

The companies said they would only share data in instances where it's necessary to improve the search experience. They added that they would continue to use their existing privacy policies to govern most data usage.

On the upside, Ovum's Mitchell lauded the fact that, "Both companies are playing to their core competencies."

The ten year agreement gives Microsoft an exclusive license to Yahoo's search technologies, which Microsoft will be free to integrate into its own.

That means Microsoft could borrow elements from Yahoo's new Front Doors homepage and add them to Bing. Front Doors offers direct links to popular sites like Facebook, Twitter, Ebay, and others. The links can be added to a new "My Favorites" column that appears on the home page's left hand side.

Microsoft could also integrate Yahoo Search Pad to Bing. Still in beta testing, Search Pad gives users a platform on which they can create notes based on their search results, share the information with friends, family, or business associates, and save the results for future use.

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