Google's shadow hung over Microsoft-Yahoo deal

Ballmer pins the blame on Google

In the end, Google played a significant part in the undoing of Microsoft's bid for Yahoo, the latest example of Google's ability to interfere with Microsoft's attempts to boost its online advertising business.

While the main reason Microsoft dropped its bid was a disagreement over price, Google served as the ammunition that Yahoo needed to discourage Microsoft from launching a hostile takeover.

At least, that's what Microsoft CEO Steve Ballmer [cq] maintains. As outlined in the letter he sent Saturday to his Yahoo counterpart, Jerry Yang, Microsoft discarded the option of a hostile takeover when Yahoo threatened to outsource part of its search advertising to Google.

"We regard with particular concern your apparent planning to respond to a 'hostile' bid by pursuing a new arrangement that would involve or lead to the outsourcing to Google of key paid Internet search terms offered by Yahoo today," Ballmer wrote. "In our view, such an arrangement with the dominant search provider would make an acquisition of Yahoo undesirable to us for a number of reasons."

Google has been a thorn on Microsoft's side for years. It has prompted countless valuable employees to hand Ballmer resignation letters on their way to the fabled Googleplex. It outbid Microsoft for DoubleClick. Not content with humiliating Microsoft in search advertising, Google is brazenly aiming for Microsoft's software business with its line of hosted business applications.

It's fair to assume that Ballmer's hatred for the search giant grew this weekend, seeing Google insert itself into the picture and make itself available to Yahoo as a potential spoiler of the deal.

In his letter to Yang, Ballmer said a tie-up with Google would "fundamentally undermine Yahoo's own strategy and long-term viability" by pushing more customers towards Google's advertising platform.

Yahoo, of course, would not see an advertising deal with Google as the corporate suicide that Ballmer makes it out to be.

The company declined to comment about Ballmer's characterization of the Google deal, but a source familiar with Yahoo's plans said the company did not use it as a way to repel Microsoft.

"The commercial agreement was always something that the board of directors had considered as a way to monetize the search business," said the person, who asked for anonymity. A deal to outsource part of Yahoo's search ad business to Google is still on the table, and could be announced next week, the person said.

But while the deal would yield benefits in the short term, the longer term consequences of a Google tie-up could be disastrous for Yahoo, and Ballmer spends much of his letter arguing that would be the case.

An outsourcing deal would send a confusing message to Yahoo advertisers and prevent Yahoo from offering clients the benefits of a unified platform for both display and search advertising, Ballmer wrote.

He states convincingly that engineers working on Yahoo's ad systems would head for the door, and that regulatory and legal problems would rain down on Yahoo and any company that acquired it.

Even more horrifying for Ballmer, the deal would empower Google even more in search advertising, where it is already dominant.

"Accordingly, your apparent plan to pursue such an arrangement in the event of a proxy contest or exchange offer leads me to the firm decision not to pursue such a path," Ballmer wrote.

In other words, had it not been for the prospect of an outsourcing deal with Google, tonight's announcement would have likely been that Microsoft was getting ready to attempt a hostile takeover.

Thus, Google has helped accomplish what it wanted ever since Microsoft announced its intention to acquire Yahoo: to see the bid fizzle out. And, by extension, Google manages, again, to disrupt Microsoft's plans to give its Internet business a quick and major boost.

The question now is: How many chairs will Ballmer need to throw this weekend to vent his anger at this latest intrusion by Google?