Yahoo's Google blooper

NEW YORK--Despite newly pronounced anti-smoking attitudes, this city remains a friendlier place than California for the recreational cigar smoker. I've spent the week touring the city's cigar shops, where Jimmy Carter, urging us to love Cuba, is preaching to the converted.

Among the DuBaud entourage, however, the prospect of detente with Castro is somewhat more controversial.

"Isn't it high time we gave up all this diplomacy and embargo nonsense and started pursuing an acquisition strategy?" urged my 12-year-old son Vermel.

Spoken like a true child of the Internet age. Yahoo and Google, for example, are engaged in some shuttle diplomacy of their own that Skinside information says included a botched attempt by Yahoo to buy the red-hot search site outright.

Discussions between Yahoo and Google over the future of their relationship once their search deal expires next month paved the way to the rumored proposal.

Yahoo's decision two years ago to use Google for its search engine results took the wind right out of Inktomi's sails, and now Inktomi is trying to get Yahoo back. Losing Yahoo as a partner would hurt Google's chances to revive the good old-fashioned blowout Internet IPO it has planned for an unspecified point in the future.

But would an acquisition be preferable to an IPO?

It certainly would be from the perspective of Yahoo, which has seen the upstart siphon away more and more of its search audience. One Skinsider says the Web portal--which already owns a few percent of Google--floated a purchase price of $700 million, which wasn't rich enough for a company clearly feeling its Internet oats after snatching the AOL contract out from under Overture and having been inducted into common English parlance as a verb.

The search engine's rumored counter-offer? A cool $2 billion.

Google and Yahoo both declined to comment.

Skintelligent analysis views an acquisition strategy as perhaps the best of three difficult choices for Yahoo in dealing with the growing Google threat.

One option is to pay more attention to search and start competing on both a technology and a marketing front to stem user defection to Google. Another option is to use Google's technology--continuing along the same path Yahoo has been following and that AOL has just chosen--which has the unfortunate side effect of shoring up an increasingly threatening competitor's business.

"Google is competing with Yahoo in an important business, so I think an acquisition could make some sense," said Lanny Baker, equity analyst with brokerage giant Salomon Smith Barney, who has been huddling with Yahoo and Overture top brass in recent days trying to make sense of the recently shifting alliances. "Search is an important, lucrative business, and a bigger opportunity than the portals have realized. I don't think (an acquisition) would be a strategic miscue at all; it would let Yahoo regain all the market share they've lost and put some pressure on Overture to share more of their economics."

Other sources said the rumored negotiation would have been more plausible last month--when it is supposed to have taken place. But it wouldn't be smart now that Yahoo has signed a three-year deal with Overture (the search company formerly known as GoTo) for paid listings.

"It wouldn't make a lot of sense for Yahoo to do that deal now," said Jeff Fieler, analyst with investment bank Bear Stearns--and not only because Yahoo just shelled out for another paid-results provider. Google as a Yahoo unit would be worth less, Fieler observed, as it would be unable to pull off deals like this month's AOL coup.

Besides, a $2 billion counter-offer indicates some ambivalence on Google's part about the prospect of being acquired in the first place.

It wasn't so long ago that acquisition interest was unreciprocated in the other direction. In what in hindsight one could call a $2 billion mistake, Yahoo turned Google down when the nascent search company approached it in 1998 about an acquisition.

In recent years, Google's wild growth and building spree--it's added a directory, white pages, live advice services and other features--has fueled speculation that it could parlay its growing and loyal audience to develop a full-service portal to rival Yahoo itself.

Skintelligent analysis suggests another, more likely way Google could become a thorn in Yahoo's side: Its knack for creating technology it licenses to various portals could expand beyond search to portal-type applications, say, for chat rooms or personals ads. An acquisition by Yahoo now could ward off potential proliferation of easily adopted Google applications for a new generation of aspiring Yahoo competitors.

"Google has been a textbook in how 'powered by' is a very viable business model," said one of our more Skintillating correspondents. Yahoo is "very interested. They are smart to be interested...Google with a few switches could give Yahoo yet another headache. Google is probably a near-term discussion point that is both needing to be addressed but also distracting to longer-term strategy. And it's all about long-term strategy in the Valley these days."

My long-term strategy is to pull together next week's column. Lengthen my horizons with your rumors.