Yahoo shares staggered Friday a day after the Internet company disclosed its behind-the-scenes talks with Microsoft had ended and it had hammered out an advertising deal with Google.
Yahoo shares slid $1.27, or 5.4 percent, to $22.25 Friday afternoon, while Microsoft gained $.94, or 3.3 percent, to $29.18 as Wall Street sought to absorb the news. Google shares climbed $19.26, or 3.5 percent, to $572.21.
On Friday, a Yahoo filing with the Securities and Exchange Commission disclosed further details on its 4-year advertising deal, including a fee of as much as $250 million paid to Google if the deal ends because of a change of control at Yahoo. The payment would be reduced by half of gross revenue received by Google from the deal through the termination date.
Meanwhile, Google is allowed to terminate the deal if, after 10 months, gross revenue from the alliance is less than $83.3 million for the prior four months.
Yahoo expects the deal with Google to generate about $800 million in additional revenue annually and $250 million to $450 million in incremental cash flow in the first 12 months. After the initial four years, Yahoo will have the option to renew for two more three-year terms.
As part of the agreement, Yahoo and Google will allow users of their instant-messaging systems, Yahoo Messenger and Google Talk, to communicate with each other.
One party who is expected to weigh in on the developments is Carl Icahn, the activist investor who scooped up 59 million shares of Yahoo and tried to push the company into a union with Microsoft. In his bid to pressure Yahoo’s board and management, Mr. Icahn mounted a proxy challenge to Yahoo’s board.
In a research note, Standard & Poor’s analyst Scott Kessler said that though the $800 million revenue opportunity is “significant,” Yahoo shareholders are “warranted in questioning a company that repeatedly resisted and rebuffed premium acquisition offers of the past one and a half years.” He maintained his “hold” recommendation on the stock and lowered his 12-month price target from $33 to $27.
Needham & Company cut Yahoo’s rating from a “buy” to a “hold.” A note from UBS Securities noted that government regulators are likely to scrutinize the alliance and that though the search and content advertising partnership was structured as a non-exclusive deal, “Google will certainly be the only meaningful provider.” UBS analysts added: “Somehow, we doubt Microsoft will be shy about raising such issues to the regulators.”
On February 1, Microsoft offered to buy Yahoo for $44.6 billion and later sweetened its offer to $47.5 billion before withdrawing the deal after two months of bargaining.