How Google’s Checkbook Stymied Microsoft

Shortly after Microsoft announced its hostile bid for Yahoo, Google objected and raised the prospect that it would lobby government regulators to block any merger.

As it turned out, Google was very much the spoiler in the deal. But its most effective weapon was not threats or coercion, but its very effective, and unconventional, use of its own checkbook.

Google has agreed to sell some search advertising for Yahoo. And since Google earns far more on every search than its rivals do, this will mean an immediate increase in Yahoo’s profits.

Microsoft’s chief executive, Steven A. Ballmer, said the prospect of such a deal that could deprive Microsoft of being able to sell all Yahoo’s search ads made proceeding with a hostile takeover less attractive. And Yahoo hopes the promise of a big check each quarter from Google will placate enough shareholders to head off a revolt over its decision to turn down Microsoft’s offer of $33 a share.

It is a rare company that will help its biggest rival this way. And Google’s offer is all the more unusual because it does not neutralize Yahoo as a potential future competitor, at least explicitly.

According to what we know so far about the arrangement, Google will sell ads on some of the most popular terms on Yahoo’s search engine, giving Yahoo the vast bulk of the revenue (as it always does with sites for which it sells ads). Yahoo’s stated plan is to take that money and continue to develop its own search advertising system that is meant to rival Google. When Yahoo’s own technology is good enough, it will presumably start selling its own ads for all its terms, and try to destroy the company that had thrown it a lifeline in its time of need.