Just when we all thought the curtain had closed on the soap opera surrounding Yahoo!, the media company announced it officially ended talks with Microsoft and instead entered a partnership with Google – a match both firms hope has revenue upside of about $800 million.

I’ll admit, I’m still scratching my head on exactly why Yahoo! thought this move was a smart one for them.  I see the deal as:

*A great move for Google.  Google – which already has about 60% of consumer searches and its own vast paid search and contextual network – now has access to and will make money off of its primary rival’s inventory.

*A move to appease shareholders.  When Yahoo! turned down Microsoft’s offer of $33 per share (67% premium over Yahoo!’s current stock price), it declared (quite dramatically) that it could deliver the same expected profit to shareholders…without Microsoft’s involvement.  In his May 4 letter to employees about Yahoo!’s refusal of the MS offer, Jerry Yang says: “Our first quarter results proved that we have the right strategy, a fantastic team, and that our investments are starting to pay off. All of this reinforced our board’s position that Microsoft’s offer undervalued our unique global franchise.”

This deal with Google is clearly an effort to boost incoming cash in an attempt to boost shareholder value in response to their loss in potential return that would have come from the MS sale.

*An indicator of strategic instability.  Yahoo!’s two core businesses are 1) Display media and 2) Search marketing.  Why would they deliberately choose to give away a piece of what should be their core competency?  Not only do I think it is a bad idea to give away something that is so core to their business.  But the decision to do so also makes me question the validity of their other strategic decisions. “If they think this is a good idea, what other bad decisions are they prepared to make?”  And it makes me start to wonder about the strength of their search offering, something I had always trusted and believed was valuable in the past.   

*A cashflow stop gap, now and in the future.  It is possible that this partnership with Google will introduce new revenue to Yahoo through markets or advertisers that they don’t currently have access to.  However, this is not a long-term strategy for Yahoo to regrow its profits and make good on the promises it made shareholders when renouncing Microsoft.  Instead, I fear that 6 months or a year from now Yahoo will be looking for similar revenue opportunities to compensate for future shortfalls.

I do think a deal with MS would ultimately have been a good pairing for the two companies.  Something that would have brought advertisers greater value through the combined data and media resources of the two portals.  But culturally, fiercely independent Yahoo! could not bear to be owned by MS.  Instead, I fear they’ve allowed Google to Trojan Horse its way into their organization in return for the promise of some possible new search revenues.