When Microsoft and Yahoo announced their search engine and advertising sharing deal on Wednesday, Yahoo's stock dropped about 11 percent.
Although that was in a down market, Google's shares dropped just over one percent.
Investors don't seem happy with the deal, at least for the short-term.
That's the problem with the stock market.
This deal is much better than previous proposals from Microsoft . What probably disappointed investors is that, rather than getting a big up-front payment of millions of dollars as proposed in previous negotiations, Yahoo CEO Carol Bartz made sure this deal is designed for the long term, getting 88 percent of revenues from ads Microsoft places on yahoo's sites.
Rumors of a deal had apparently driven up Yahoo's stock price. Note that the volume of trading in Yahoo's stock increased dramatically in early July, from about 15 million shares a day on July 8 to about 54 million shares on July 22. In that time frame the stock price rose from just over $14 to over $17. After the deal it dropped back to about $15.
That means traders don't necessarily think this is a bad deal, it's just not one that immediately goosed the stock. Kudos to Bartz for not taking the easy path to please the market. The question is how good the deal will be in the long run, and the 10-year time frame for the deal is and extraordinarily large one on the Internet.
Still, this is a much better deal than previous proposals to buy Yahoo or its search engine. (Ironically, the big reversal here is that it now appears that Microsoft has decided its own search technology is better than Yahoo's.) Mergers between big companies in technology rarely work because of huge culture clashes and integration problems that distract management.
With this deal Microsoft gets a big increase in use of its new Bing search engine, a feat that's extremely important to the company. It will also license some of Yahoo's search technologies, presumably taking the best features to further enhance Bing. Most important is the fact that Microsoft will use its search engine to place relevant ads from smaller advertisers to accompany search results, with most of that revenue going to Yahoo. Both companies benefit from that.
But there are still some big caveats.
The first question is whether it will pass muster with the FTC and Justice Department, which was ready to kill a similar deal between Yahoo and Google earlier this year. Microsoft is confident: General counsel Brad Smith said he was looking forward to explaining to regulators why the deal will increase competition.
The second question has not been addressed.