Microsoft's Ballmer defends Yahoo! deal after poor reception

NEW YORK - Microsoft's chief executive Steve Ballmer has defended the software giant's 10-year search deal with Yahoo!, after shares in the internet giant slumped, telling investors that it was a "win-win partnership".

The two firms confirmed the landmark deal on Wednesday, which will result in Microsoft's Bing search engine being used to power Yahoo!'s search. The partnership will enable advertisers to benefit from scale while working with a single platform.

However, the market reacted poorly to the news. Yahoo!'s share price tumbled 12% after the deal was announced and dropped an additional 3.6% on Thursday to $14.6 at close of trading.

Microsoft shares rose only slightly, gaining one cent to close at $23.81.

Ballmer, speaking at a meeting with investment analysts at Microsoft's headquarters near Seattle, said: "I was myself kind of surprised by the market reaction. Nobody gets it. It's a little bit complicated."

"Yahoo gets 88% of the search revenue they have today. They have 0% cost of goods sold against 88% revenue and they have no R&D (research and development) expense and no ongoing [capital expenditure]. It's sort of unbelievable."

The search deal aims to rival Google, which dominates more than 80% of all UK search, and will see each company maintain its own separate display advertising business and sales force.

Ballmer said Yahoo! would likely see its profits expand 70% from the partnership, based on numbers Yahoo! released, and Microsoft would get more internet traffic, enabling it to refine its search technology, leading to more interest from ad buyers and better prices for its ads.

He said: "It's a win-win deal from my perspective."

Microsoft and Yahoo! had been conducting talks, on and off, for months following Yahoo!'s rejection of the software giant's $47.5bn takeover bid last year.

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