A Yahoo-Google Search Deal? Jefferies Does The Math

In a report published Friday, Jefferies analysts maintained a Buy rating on Yahoo! Inc. YHOO, with a price target of $61. Yahoo! and Microsoft Corporation MSFT have updated their search partnership, providing the former with increased flexibility. The analysts believe that an additional search arrangement between Yahoo! and Google Inc GOOG could "potentially make sense" for Yahoo! In July 2009, Yahoo! and Microsoft had entered into a ten-year agreement according to which the latter's search engine Bing would be powered by the former's search results. Yahoo! would be the exclusive worldwide sales force for the premium search advertisers for both the companies. Additionally, Microsoft's adCenter platform would exclusively be used by advertisers to bid on keywords. In 2009, Yahoo! was making around $0.03-$0.04 per search on its US O&O properties, as compared to around $0.07-$0.08 being made by Google (US desktop search). An alliance with Google could add $5 to $10 per share in value for Yahoo! "We don't know the Google search partner rev-share, but if the RPS [revenue per search] for Yahoo! gets near parity, then under reasonable assumptions, the RPS improvement should more than offset a higher rev-share," the analysts explained. In the report Jefferies noted, "A Yahoo!/Google alliance would likely benefit advertisers. Today, advertisers can source queries on Yahoo!, but they aren't being monetized at the same click yield as they would on Google, and we believe this is partly due to Microsoft's data disadvantage and lower scale. If the ad tech were powered by Google, advertisers should convert more queries." There are regulatory concerns however; with the EU recently filing formal antitrust charges against Google for its comparison-shopping service. "Google may be turned off from adding to its dominant search position to avoid further charges," the analysts pointed out.