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With Microsoft Out, All Eyes On Yahoo CEO Yang

Just two days after Microsoft pulled out of merger talks, Yahoo's stock dropped more than 15%, erasing roughly $6.5 billion in market value.

Now that Yahoo chief executive Jerry Yang has escaped what he considered a bargain-basement takeover offer from Microsoft, the co-founder of one of the largest Web portals will have to prove that he doesn't need the merger to catch rival Google, which dominates the lucrative online search business.

Just two days after Microsoft pulled out of merger talks, Yang Monday suffered his first big blow, a more than 15% drop in stock price as Wall Street let him know how much it thinks Yahoo is worth now that Microsoft is out of the picture. The drop to about $24 a share erased roughly $6.5 billion in market value.

Microsoft left the negotiating table after Yahoo rejected the software maker's offer to raise its $44.6 billion bid by $5 billion. Microsoft's final offer of $33 a share, $2 more than its previous bid, wasn't enough for Yahoo's board, which wanted about $37 a share, or about $53 billion.

"We think Microsoft's bid was very generous and Yahoo should have taken the deal, because Google is out-innovating them and continues to take share," Avian Securities analyst Matt Bryson said in a research note Monday. "That's unlikely to change under Yahoo's current strategy."

That strategy amounts to if you can't beat 'em, join 'em. Yahoo is in discussions to outsource its search advertising to Google. The deal would be similar to partnerships Google has with other Internet companies, such as Time Warner's AOL and IAC/InterActiveCorp.

Yahoo in April started carrying Web search advertising from Google as part of a two-week test that was limited to no more than 3% of Yahoo's search queries. The companies have not said how well the test went, but any deal would likely draw intense scrutiny from antitrust regulators.

Google accounts for almost 60% of all U.S. searches, while Yahoo is a distant second at slightly more than 21%, according to ComScore.

Along with the Google talks, Yahoo reportedly has been chatting with Time Warner about its AOL unit, and with News Corp., which owns the Web's most popular social network, MySpace. The deals would involve Yahoo taking control of the Internet assets in return for an infusion of cash. In return, Yahoo would give up control of 20% of the company, the San Francisco Chronicle reported.

Yang's plans remain between him and his board. In a blog posting, the CEO offered little insight, saying, "With Microsoft's withdrawal, we'll be better able to focus our energy on growing our industry leadership and maximizing value for stockholders."

The CEO, however, sounded confident, despite the intense scrutiny he's likely to receive from major stockholders who will demand he bring the company's stock at least to the level of Microsoft's offer. "We know the spotlight will probably stay on us for a while," he said. "That's fine -- we have a clear path ahead and momentum to build on."

For Microsoft, its decision to walk rather than "overpay for Yahoo was the right one," Bryson said, noting that Microsoft may get another opportunity to acquire Yahoo down the road. That opportunity is likely to rise if Yang fails to make good on his promise to revive his lagging portal.

In the meantime, Microsoft also will have to come up with a strategy on its own to tackle 800-pound gorilla Google. "We think Microsoft should spend its money on developing the next generation of Internet apps in the areas of video and mobile rather than try to catch up to Google directly," Bryson said.

Online video is booming on the Web in terms of use, but remains relatively new ground for advertisers. An anticipated abundance of new mobile devices, following the marketing success of Apple's iPhone, are expected to open up new sources of ad revenue.

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