Majestic Research

Investor's Business Daily

EBay Could Gain in a Yahoo Acquisition

Published: February 06, 2008

When an 800-pound gorilla gets even larger, many other animals run for cover.

In the case of Microsoft’s $44.6 billion bid for Yahoo, analysts say two other leaders in the e-jungle—eBay and Amazon—might actually end up with more bananas.

Analysts say it’s too early to give any specifics, but they see few negatives for eBay or Amazon by a Microsoft-Yahoo marriage, at least in the short run.

And they say there might well be some benefits.

One plus, says Majestic Research analyst John Aiken, is that Microsoft and Yahoo could combine their tech savvy to create a more advanced search engine—one that would bring more potential buyers to Amazon and eBay sites than would two inferior search services run separately by Microsoft and Yahoo.

“If you’re eBay or Amazon, a Microsoft-Yahoo combination gives you a chance to link your sites to a bigger, more technologically advanced search site,” Aiken said.

More than that, a strong No. 2 in search would put more pressure on search leader Google GOOG in terms of how much advertisers pay for search ads. A strong Microsoft-Yahoo gives advertisers more leverage, says Tom Burnett, an analyst with Wall Street Access.

In other ways, eBay more than Amazon stands to possibly see some gains from a Microsoft-Yahoo merger, analysts say.

The San Jose, Calif.-based online auction leader inked a strategic pact with Yahoo in May 2006, aimed at boosting both of their businesses in the U.S.

Under the multiyear deal, which doesn’t have a termination date, Yahoo’s various e-commerce sites offer eBay’s online payment service PayPal to its customers.

Yahoo also provides all the display ads on eBay’s site. And if a Microsoft-Yahoo combination can bring better ads to eBay’s site, that’s a bigger split of the ad proceeds for eBay.

Assuming that a Microsoft takeover of Yahoo doesn’t alter this pact, Aiken says eBay will be buoyed from its partnership with a stronger, post-merger Yahoo.

But there is a potential big negative for eBay in a Microsoft-Yahoo linkup. That would be if Microsoft-Yahoo decided to go toe-to-toe again against eBay in auctions. Yahoo shut its auction sites in the U.S. and Canada in June after failing to make much headway against eBay. Yahoo continues to offer online auctions in Asia.

EBay revised its auction fee structure on Jan. 29, resulting in fee hikes for some sellers. Angry sellers could look to defect to a re-energized Microsoft-Yahoo.

Amazon, on the other hand, hasn’t had a major pact with Yahoo since 2000, when an agreement that made Amazon the preferred seller of books on Yahoo lapsed.

But analysts say Amazon, too, would benefit from any improvement in Yahoo’s search channel and improvements in its search ad network. These networks seek to strategically place ads on certain search results pages.

Analysts say that, for the most part, it’s too early to gauge the impact on eBay and Amazon from Microsoft’s possible acquisition.

Yahoo’s directors are mulling what the company calls “a wide range"of options and haven’t yet directly responded to Microsoft’s bid, which the software leader announced on Friday. U.S. and European regulators are sure to look at antitrust issues, and Google is working to spark opposition.

“There are a lot of balls in the air right now,” said Burnett, of Wall Street Access. “The AOL/Time Warner deal took a year to complete, so it’s way too early for anything to happen.”

Aside from everything else, Microsoft could have a hard time welding the two corporate cultures.

“Integrating technology and other differences between the two companies isn’t going to be easy,” Aiken said. “It will probably take two solid years to execute this deal.”