Counting the Cost of MicroYahGoogleCahn

How much did Yahoo's (YHOO) battle with Microsoft (MSFT) and Carl Icahn cost the company?

In an S.E.C. filing yesterday, Yahoo reported spending $36 million in the first half of 2008 on "outside advisers" related to Microsoft's bid, as well as "other strategic alternatives, the recently resolved proxy contest, and related litigation defense costs." That figure doesn't include July, when the company went on the offensive against Icahn.

While $36 million is nothing to sniff at, the true cost of the Microsoft saga to Yahoo and its shareholders surely must be much higher.

For one thing, if Yahoo had accepted Microsoft's $33 per share offer, as it said it was prepared to do only after Microsoft backed out, the company's shareholders would collectively be $18 billion wealthier than they are today, as the company's stock price continues to trade at around $20.

Moreover, as PaidContent's Staci D. Kramer notes, $36 million "doesn't begin to cover the amount Yahoo lost in sunk time, diverted internal resources, and pure distraction."

Indeed, for six months, while Yahoo's senior management was preoccupied with fending off Microsoft's onslaught, Google (GOOG), its chief rival, was powering ahead. By June, Google was approaching 70 percent of the U.S. Web search market, up from 63.92 percent the previous year, according to Hitwise. Yahoo, meanwhile, saw its market share drop from 21.31 percent to 19.62 percent, over the same period.

If Yahoo's senior managers weren't distracted by the Microsoft saga, would the company have been able to stem Google's advance somewhat? One can't say with certainty, but the company's preoccupation with the takeover bid can't have helped.

Then there is the significant brain drain that Yahoo experienced in the midst of the battle. In the months since Microsoft made its bid, literally dozens of executives left Yahoo, including Jeremy Zawodny, the company's chief technology evangelist, Brad Garlinghouse, SVP of communications and communities, Vish Makhijani, SVP and general manager of search, Jeff Weiner, EVP of the network division, and Qi Lu, EVP of engineering for search advertising.

Again, it's impossible to attribute all of these departures to Microsoft's bid, but it's important to remember that at one time, just a few months ago, most observers thought Microsoft would eventually acquire Yahoo (some still do). And it was no secret that many top execs were less than enamored with the prospect of being swallowed up by the hated Microsoft.

Finally, Yahoo suffered from a loss of shareholder confidence thanks to Jerry Yang's bungling of Microsoft's offer. This loss of confidence was reflected at the company's annual meeting, when one third of shareholders withheld their votes from Jerry Yang.

Taken together, these factors suggest that the true cost of the Microsoft saga to Yahoo was even higher than the $36 million the company spent on outside advisers.

Of course, there is a potential upside for Yahoo. Before Microsoft's bid, entering into a search ad deal with arch-rival Google -- which the company did as a way to fend off Microsoft's advances -- would have been almost unthinkable. But if the deal passes regulatory muster, Yahoo expects the pact to boost revenues by as much as $800 million in the first year.