Google's Real Interest In Yahoo

Oct.25.11 | About: Yahoo! Inc. (YHOO)

By Justin Dove

Yahoo (Nasdaq: YHOO) is a hot rumor in mergers and acquisition activity lately. First, there was news that the Chinese e-commerce company Alibaba (OTC: ALBIY.PK) was interested in a takeover. Then Microsoft (Nasdaq: MSFT) was announced as a potential suitor three years after an unsuccessful attempt to take over the company. Now the latest rumors tab search-engine giant Google (Nasdaq: GOOG) as a potential buyer. According to the reports, Google has talked to at least two private equity firms about potentially financing a deal.

While there are certainly some valuable parts of Yahoo’s franchise that may interest Google, it doesn’t seem probable that the interest is genuine. It sounds like Google is posing as a potential buyer in the hope of driving up the cost of the acquisition for its major rival, Microsoft.

“Fake” interest as a tactic

Although it may sound a bit like a conspiracy theory, it’s a tactic used in business all the time.

Baseball fans may remember that this past offseason the New York Yankees used “fake” interest in Carl Crawford to help drive up the bidding price and ultimately force the Boston Red Sox to pay an inflated $142 million for a seven-year contract. New York General Manager Brian Cashman later admitted that the team had no real interest, but wanted to drive up the price tag.

The rivalry between Google and Microsoft is somewhat comparable to that of the Yankees and Red Sox. The two companies battle for talent and have increasingly overlapped each other’s markets.

Just to name a few battlefields for the two companies:

  • Google introduced Google Docs to battle Microsoft Office.
  • Microsoft introduced Bing to challenge Google’s search engine supremacy.
  • Microsoft recently joined forces with its former enemy, Apple (Nasdaq: AAPL), and other companies to launch a patent war against Google’s Android mobile operating platform.
  • Now it appears Microsoft is gaining some steam to compete with Android in the tablet platform space with its Windows 8 product after failing to have much success with its previous endeavor into a mobile operating system.

The Bottom Line

Yahoo stock is already benefiting from the Google rumors as it was up more than 3.5% Monday. It’s unlikely Google would take on the antitrust attention and all of the problems Yahoo is facing.

But Microsoft could see value in Yahoo as a means to advance Bing in its competition with Google for search engine supremacy. Google may see this as a competitive move against them and be looking to drive up the price to make it harder on Microsoft.

Even though Google probably doesn’t have genuine interest, its potentially “fake” interest could still bring a higher premium in a possible takeover.

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