Yahoo defends Google deal to shareholders

Yahoo on Wednesday sent a letter to its shareholders justifying its deal with Google, saying it will enhance the company's profitability and provide more shareholder value than the offer put forth by Microsoft to invest in Yahoo's search business.

The deal with Google will generate US$250 million to US$450 million in incremental operating cash flow for Yahoo in the first year, Yahoo Chairman Roy Bostock and CEO Jerry Yang wrote in the joint letter.

Microsoft's offer to buy Yahoo's search business for $1 billion and invest another US$8 billion required Yahoo to commit to a 10-year exclusive arrangement that "would have made us dependent on Microsoft for all of our search business," Bostock and Yang wrote.

It would also have given Microsoft a powerful role in determining Yahoo's future, including the right to veto the sale of Yahoo, they wrote.

Microsoft announced an unsolicited offer to buy Yahoo on February 1 for US$44.6 billion. Yahoo's board rejected that offer, saying it undervalued the company. Microsoft increased its offer to US$47.5 billion, but on May 3, Microsoft abandoned talks after the two sides failed to agree on a price.

At the time, investors criticized Yang and Yahoo's board for allegedly not negotiating in good faith and failing to look out for shareholders' best interests.

Since then, Microsoft has repeatedly denied an interest in acquiring all of Yahoo, but offered to buy Yahoo's search advertising business. Those negotiations fell through. Yahoo instead signed a deal with Google to outsource part of its search ad business.

Under the deal with Google, Yahoo will run sponsored search ads supplied by Google alongside Yahoo's search results. Google will pay Yahoo a fee based on revenue from click-throughs generated by Google's ads on Yahoo.