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Analysis: what next for Microsoft and Yahoo?

Now Yahoo has to deliver... can it?

Microsoft's three-month courtship of Yahoo has ended but it changed both companies forever. Neither Microsoft nor Yahoo will ever be the same again.

Microsoft and Yahoo now need to deliver on promises, address questions, reassess and adjust plans and deal with challenges that grew from and during the attempted acquisition.

"The key thing is that both companies are going to have to articulate very clearly what their strategies going forward will be," said Forrester Research analyst Charlene Li in a phone interview.

Follow the whole Microsoft Yahoo saga at PC Advisor's dedicated Microsoft News Spotlight

Yahoo has the most to prove and deliver upon, while facing a more uncertain future.

"For Yahoo, this is a situation of 'Be careful what you wish for,'" said industry analyst Greg Sterling of Sterling Market Intelligence in a phone interview.

"Yahoo's directors and management very strongly indicated that they wanted to remain independent and now they get that opportunity."

First order of business for Yahoo will be to monitor its stock, which got a boost after the acquisition bid and now faces a possibly negative reaction from financial markets.

If the stock gets clobbered in the coming days and doesn't rebound, Yahoo could find itself an acquisition target again from other suitors, and possibly under less favorable conditions and terms.

Even if the stock holds up, it's still very likely that Yahoo will be pelted with a flurry of lawsuits from shareholders that feel the company didn't look out for their best interests when rejecting Microsoft's offer.

In addition, Yahoo will have to hustle to deliver on all the ambitious plans and promises it made these past three months, and prove that it can indeed turn its ship around as an independent company.

Financial analyst Clayton Moran from Stanford Group Company is pessimistic about Wall Street's reaction to Yahoo and about the company's ability to significantly improve its financial situation.

"Yahoo has missed an opportunity. We expect the stock to drop materially," he said in an email interview.

Moran doesn't believe that in the coming 12 to 18 months Yahoo's stock will reach the $37 per share value that the company wanted Microsoft to offer and over which negotiations eventually broke down.

"Yahoo’s best alternative was to sell to Microsoft. As an independent company, Yahoo has lost market share and struggled to grow cash flow. We suspect these trends will remain intact for the foreseeable future," Moran said.

Beyond the potential financial turmoil, Yahoo will need to follow through on the many lofty projects it has kicked off, such as its new AMP advertising management platform and its Yahoo Open Strategy (YOS) for letting outside developers create applications across its network of sites and services.

"Yahoo has some very ambitious plans they have announced these past three months and now they have to deliver and start fulfilling the promise some of these projects represent," Sterling said.

"The onus is on Yahoo to explain why it's worth $37 per share and in particular to articulate very quickly what its strategy is, now that it's been given this reprieve," Li said.

It's also unclear how wise it will be of Yahoo to outsource a significant portion of its search advertising business to Google, a deal that, if completed, may be announced as early as next week, according to a source close to Yahoo.

"While Yahoo may pursue a Google search partnership as a way to appease shareholders through enhanced cash flow, we believe such a deal would face intense anti-trust scrutiny. In addition, it would cede control of search to Google," Moran said.

Li isn't convinced that the deal's short-term financial boost will justify passing up the long-term advantage of being able to integrate search into its overall ad strategy. "That's going to be interesting to watch," she said.

Microsoft also has its own set of challenges created by its bid. For starters, it needs to explain how it plans to boost its Internet unit now that the bid collapsed, after outlining many reasons why it needed Yahoo to do it, she said.

This would be a good time for Microsoft to change course and stop vowing to catch Google in search advertising.

"That game is over and Google won," Li said.

However, by focusing on unifying display advertising, such as banner ads, with search advertising in a single platform, Microsoft, as well as Yahoo, could compete more effectively against Google, whose display advertising business is very small, she said. The synergy between search and display ads can make both formats significantly more effective and valuable to advertisers, Li said.

NEXT PAGE: are display ads the answer?


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