In a new filing with the SEC, Yahoo spells out the terms of the search-advertising agreement it announced yesterday with Google. Most of the filing fleshes out known details about the agreement. But it also discloses something Jerry Yang and Sue Decker didn’t want to talk about yesterday. The deal includes an $83 million escape clause for Google:
Google may terminate the Services Agreement if, after ten months after the Services are first launched, and each month thereafter, the gross revenues recognized by Google under the Services Agreement are less than $83,333,333 for the four prior calendar months.
In other words, Google has a minimum guarantee of serving at least $83 million worth of ads through Yahoo on a rolling 4-month basis, or else it can walk away. That’s a pretty tiny threshold, considering that Yahoo’s quarterly U.S. revenues are $1.3 billion. The amount comes to about one percent of Yahoo’s total projected revenues for 2008. (When Yahoo president Sue Decker was asked about minimum guarantees yesterday during a conference call, she wouldn’t comment).
There is another clause that lets both companies out of the agreement without penalty to avoid antitrust lawsuits or other similar actions. But Google negotiated a $250 million kill fee if the agreement is terminated within two years because of a “change in control” of Yahoo (i.e., a sale). Update: A change in control is defined as occurring if more than 50 percent of Yahoo’s shares are purchased by another company (in the case of Microsoft, News Corp., or Time Warner, that threshold is lowered to 35 percent). Curiously, the agreement provides loopholes for a change of control “triggered by” Microsoft acquiring more than 15 percent of shares on the open market or more than 5 percent of shares acquired directly from Yahoo or buying any part of Yahoo representing more than one percent of its annual revenues. If any of this happens, Yahoo does not have to pay the fee If Yahoo is acquired by Microsoft, it doesn’t have to pay the fee. Thus, this single clause means that anyone other than Microsoft might have to pay up to $250 million more to buy Yahoo.
If the Services Agreement is terminated by either party within 24 months of the Effective Date as a result of a Change in Control of Yahoo! (other than a Change in Control triggered only by Microsoft …), Yahoo! is required to pay to Google the sum of $250,000,000
The agreement also explains Yahoo’s discretion in deciding how, when, and where to display Google ads. It also goes into how the deal is structured. There are two portions. Google is to pay Yahoo both a variable and fixed percentage of the gross revenues it generates through the deal. The variable percentage is based on monthly targets, presumably on top of a fixed percentage. The actual percentages of the revenue split was not disclosed:
Under the Services Agreement, Yahoo! has sole discretion to choose which search queries to send to Google and is not obligated to send any minimum number of search queries. Yahoo! also has sole discretion to decide on which pages to display ads provided by Google through its AFC Services. In addition, the Services Agreement is non-exclusive, and expressly provides that Yahoo! is not prevented from implementing any other advertising, promotion or marketing service or monetization method, including any that are the same as or substantially similar in nature to the Services or displaying comparable advertisements. Yahoo! also has sole discretion with respect to the placement and location of ads generated from the Services, the number of ads requested and the formatting of ads. Additionally, Yahoo! may serve its own ads or third-party ads alongside Google ads.
Google will pay Yahoo! a percentage of the gross revenues generated from AFS Services on the Yahoo! Properties, with such percentage adjusting based on specified monthly gross revenue thresholds, and with respect to the Yahoo! Partner Properties will pay a similar percentage of gross revenues less a separate specified percentage. Google will also pay Yahoo! a fixed percentage of gross revenues generated from AFC Services on the Yahoo! Properties and a fixed percentage of gross revenues for AFC Services on Yahoo! Partner Properties.
The full text of the agreement follows:
Item 1.01. Entry into a Material Definitive Agreement.
Services Agreement
On June 12, 2008 (the “Effective Date”), Yahoo! Inc., a Delaware corporation (“Yahoo!”), and Google Inc., a Delaware corporation (“Google”), entered into a Services Agreement (the “Services Agreement”), pursuant to which Google will provide Yahoo! with advertisements through Google’s AdSense for Search service (the “AFS Services”) and AdSense for Content service (the “AFC Services” and together with the “AFS Services,” the “Services”) for display on web sites and other applications owned and operated by Yahoo! and its subsidiaries (the “Yahoo! Properties”) and certain of Yahoo!’s business partners/affiliates (the “Yahoo! Partner Properties”). The Services Agreement applies to properties within the United States and Canada.Under the Services Agreement, Yahoo! has sole discretion to choose which search queries to send to Google and is not obligated to send any minimum number of search queries. Yahoo! also has sole discretion to decide on which pages to display ads provided by Google through its AFC Services. In addition, the Services Agreement is non-exclusive, and expressly provides that Yahoo! is not prevented from implementing any other advertising, promotion or marketing service or monetization method, including any that are the same as or substantially similar in nature to the Services or displaying comparable advertisements. Yahoo! also has sole discretion with respect to the placement and location of ads generated from the Services, the number of ads requested and the formatting of ads. Additionally, Yahoo! may serve its own ads or third-party ads alongside Google ads.
Google will pay Yahoo! a percentage of the gross revenues generated from AFS Services on the Yahoo! Properties, with such percentage adjusting based on specified monthly gross revenue thresholds, and with respect to the Yahoo! Partner Properties will pay a similar percentage of gross revenues less a separate specified percentage. Google will also pay Yahoo! a fixed percentage of gross revenues generated from AFC Services on the Yahoo! Properties and a fixed percentage of gross revenues for AFC Services on Yahoo! Partner Properties.
The initial term of the Services Agreement commenced on the Effective Date and will continue for a period of four years thereafter. Yahoo! may, at its option, extend the term of the Services Agreement for up to two additional periods of three years each. Either party may terminate the Services Agreement upon notice to the other party (i) in the event of an uncured material breach of the Services Agreement by the other party, subject to dispute resolution procedures and certain limitations; (ii) in the event of a Change in Control (as defined below) involving either party; (iii) 120 days after the Effective Date in order to avoid or end a lawsuit or similar action filed on competition law grounds if the terminating party has taken all actions required under the Services Agreement with respect to regulatory matters and defending such action is not commercially reasonable for that party (taking all factors into account); or (iv) if a court of competent jurisdiction has entered an order enjoining the implementation of the Services Agreement. In addition, Google may terminate the Services Agreement if, after ten months after the Services are first launched, and each month thereafter, the gross revenues recognized by Google under the Services Agreement are less than $83,333,333 for the four prior calendar months.
As defined in the Services Agreement, the term “Change in Control” means (a) a merger, consolidation, statutory share exchange, recapitalization, restructuring or business combination involving directly or indirectly a party or a subsidiary of a party in which voting securities of the party outstanding immediately prior to such transaction do not continue to represent more than 50% (or 65% in the case of a transaction involving Microsoft Corporation (“Microsoft”), Time Warner Inc. (“Time Warner”) or News Corporation (“News Corp”), in each case together with their respective affiliates) of the voting power represented by the outstanding voting securities of the surviving entity immediately following the transaction; (b) any “person” or “group” becoming the “beneficial owner” (as such terms are used or defined in Sections 13(d) and 14(d) under the Securities Exchange Act of 1934, as amended) of more than 50% of the voting power of the then outstanding voting securities of the party, except that, in the case of Time Warner and News Corp, the percentage will be 35% instead of 50% and, in the case of Microsoft, the percentage will be 15% instead of 50% and a Change in Control will also be deemed to occur if Microsoft (i) beneficially owns 15% of the voting power of the party or (ii) acquires directly from a party any equity or voting securities of that party representing (or having a right to receive in the aggregate) 5% or more of the total equity value of the party or 1% or more of the party’s annual revenues on a consolidated basis); (c) approval by the stockholders of a party of a plan of liquidation or dissolution; (d) the sale or disposition of all or substantially all the consolidated assets of a party; or (e) at any point in time, Yahoo! no longer owns and, with respect to the U.S. and Canada, controls a majority portion of Yahoo!’s technology and intellectual property assets that in the 12-month period prior to that time had been owned by Yahoo! and used by Yahoo! to provide services in the U.S. and Canada for either its algorithmic search or search advertising business. The Services Agreement also permits Google to suspend performance of the Services under certain circumstances, including a pending Change in Control of Yahoo! involving Microsoft, Time Warner or News Corp and a change in a majority of the board of directors of Yahoo! following an annual or special meeting of stockholders if a majority of the new directors did not serve on Yahoo!’s board immediately prior to such stockholder meeting and were nominated or solicited for by Microsoft, Time Warner or News Corp or, solely with respect to Yahoo!’s first two annual or special meetings held after the Effective Date where the election of a majority of directors is before Yahoo! stockholders (but not later than September 1, 2009), by any other person or group.
If the Services Agreement is terminated by either party within 24 months of the Effective Date as a result of a Change in Control of Yahoo! (other than a Change in Control triggered only by Microsoft either (x) acquiring beneficial ownership of voting securities representing more than 15% of the voting power of outstanding Yahoo! voting securities or (y) acquiring directly from Yahoo! equity or voting securities representing 5% or more of Yahoo!’s total equity value or 1% or more of Yahoo!’s consolidated annual revenues, unless Microsoft becomes the beneficial owner of more than 35% of the voting power of such securities within such 24 month period), Yahoo! is required to pay to Google the sum of $250,000,000, which payment will be reduced by one-half of an amount equal to (a) all gross revenues received by Google pursuant to the Services Agreement through the date of termination less (b) the amount equal to Yahoo!’s share of such gross revenues during the same period.
awesome post. I need a bit of legalese to spice up my day.
Is it 83.3 million per 4-month period or per year? My understanding is that it is on a 4-month rolling basis…
“Google may terminate the Services Agreement if… gross revenues recognized by Google under the Services Agreement are less than $83,333,333 for the four prior calendar months.”
not a 12-month as you state in the article…
“Google has a minimum guarantee of serving at least $83 million worth of ads through Yahoo on a rolling 12-month basis”
Three thoughts:
I think Yahoo will end up hurting big time due to all of this. Google ropadoped Yahoo.
Advertisers will ultimately end up competing against themselves and paying to “masters” fighting a battle against an unknown, unseen algorithm that places ads on a page.
Microsoft needs to get in the game big time and there aren’t easy answers for them.
akshaytech.com
Thanks for the catch, Jason, I was reading/posting too fast. Now fixed.
so they put in a $250MM kill fee poison pill against Icahn but were too scared of the feds to put it in against msft…
Heres what Microsoft should do:
If you can’t get a piece of the pie, destroy the pie instead and hit Google where it hurts the most.
Use their FAST technology to build a free search engine and make the API/crawl data available to others outside and in the US.
Make the license with a “first come” option to by, so they have their pick of the best/biggest of the 10.000 of thousand of new search engines startups that would arise from this.
That would definitely create some competition and some innovation..
Thanks for the catch, Jason, I was reading/posting too fast. Now fixed
Notice the breakup fee actually does apply to Microsoft as well, but only if Microsoft becomes the owner of more than 35% of the voting power of Yahoo securities.
Obviously, if Microsoft actually bought Yahoo, that condition would occur and Yahoo would have to pay the same $250M.
The comment bot in #8 in now cloning editor’s comments?
I would set the poison pill for M$ to 10B so they never think again about fucking with Yahoo
How does the consumer benefit from this? We need choice in this industry and nothing can be googlised or embedded with microsoft. Competition is good for the industry as it drives innovation
Yahoo: Won’t be bought, yet still totally p0wned.
If this clause doesn’t matter then why write an article based on it?
I hope Yang is personally held accountable for this deal. He TOOK shareholder money by going public, and now he’s trying to Take MORE by injecting this “change of control” clause. That CAN’T be legal, and certainly is NOT ethical. He’s making it hard for us, the shareholders, to “can” his sorry ass.
Duh, he regrets not doing what Google did, and having multiple classes of stock that make it impossible for anyone else to wrestle control from the founders. A little late now, bub. I bought the shares with the understanding that you would do what’s best for the shareholders, not necessarily what’s best for Yang – AND that if you didn’t, we could fire you. Now you try to change the rules, making it prohibitively expensive to fire your ass. See you in court!
Nice digging Erick.
Perhaps the change of control fee is aimed at someone like Carl Icahn.
Oh man, that’s beautiful, Yahoo is as much as saying that they’ll be sold by the end of the year with that language.
You’re reading the Google revenue out clause as $83 million OVER four months – but does “for the four prior calendar months” not mean $83 million PER month?
$83,333,333 million per month is $1 billion a year. An 80% rev share would get Yahoo to its stated $800 million revenue figure. To me, that seems like what they’re saying – Yahoo is publicly stating they expect $800 million a year; Google is saying the same thing by requiring a $1 billion annual run rate.
No?
@15,
I think you misunderstood the kill fee. The kill fee is only applicable if Yahoo is NOT hostily taken over by Microsoft. The only company seemingly interested in doing that is microsoft. I do not see a conflict there.
“now he’s trying to Take MORE by injecting this “change of control” clause.”
The money would go to Google and a termination clause such as that one is pretty normal. When my company was going to be the north american distributer for Mandrake Linux there was a similar clause.
But I never heard of Yang owning Google stock??
Can anybody confirm that he owns some Google stock?
How would Yang benefit?
I left 2 seesmic comments from the airport here, and none of them showed up. I think Seesmic is broken.
The breakup fee is a red herring. Yahoo is under no obligation to use any Google ads (no minimum). So let’s say Carl Icahn gains control. He simply doesn’t use Google ads and then Google can eventually terminate the deal…if they so desire. So the breakup fee is easily averted.
That said, I’m buying YHOO on the dip because I believe that the MSFT deal will eventually go through, one way or the other.
nevermind. The airport wifi caches on the access point. My AT&T doesn’t work in Canada.
Great post. Thanks for the info – I’m curious to see what Microsoft is thinking about all of this…
How big is this deal really? Will it have any impact on either company’s bottom line, or is this just PR. $83 million? Google spends that much on volleyball nets.
Nice digging Erick.
Can someone explain what AFC Services and AFS Services are please?
@ flashcard – if icahn acquires yhoo then goog can terminate (”either party”) and yhoo has to pay goog $250MM (less 1/2 revs rec’d) – they may not elect to do so but it’s a well-loaded gun goog will be able to hold at icahn’s head.
An 83 million dollar threshhold? That is nothing for the two biggest internet giants. Yahoo has really screwed their relations with their stock holders. Unless there is some longterm strategy at play, and a Yahoo-Google deal is just one of the initial objectives, Yahoo has really put themselves in the hole. There is or was a couple options for Yahoo: Get bought out, partner with internet companies, acquire companies to provide more services, innovate. The one thing about Yahoo that is going for them is their very loyal customer base. They have continually been ranked the number 1 internet destination for years. Its interesting to see how these non-traditional business strategies and tactics apply to the Yahoo-Google operation…
http://www.read...ex.php?rta=blog
I actually think that the $83 mil threshold is a big number.
There’s some sloppy contract work – it is unclear from the language if GOOG has an out if the gross revenues from this deal are less than $83.3 mil for the prior 4 calendar months in total, or if the average monthly revenue for the prior 4 months is less than $83.3 mil EACH MONTH.
I would guess that it is the latter, and if so, this indicates an expectation that this relationship will generate signficant volume. $83.33 x 12 months = $1 billion in annual gross revenue. That is a big number when compared to Y’s current revenues, especially given that this is only for North America.
YHOO had $1.8 bil in total global revenue in Q1, but “mktg services” is only a portion and US/CA is only a portion. They don’t break it out by both geography and product line together, but back of the envelope calculations would indicate that US/CA “mktg services” revenues are $1.0-1.2 bil in Q1 – or $4-5bil annualized.
So a GOOG deal at $1 bil in annual revenues would account for 20-25% of that total. But remember, that revenue figure includes search and media advertising revenue. I assume the GOOG deal is only for search, not media. The YHOO press release doesn’t break out their mktg services revenue by search/media (i’m sure it’s available somewhere but i’m too lazy to look), but use a simple 50/50 split — this indicates they expect GOOG deal to be driving roughly half of the US-based search revenues within 10 months!
Google provided all the search technology for Yahoo. Then Yahoo bought a company called Overture that actually helped pioneer search advertising but had been outdone by Google. It was a complicated relationship as the competitors tried to cooperate, with lawsuits and settlements resulting. By 2004, Yahoo thought it had the tools to go it alone and ended the deal with Google. Turns out it was only a temporary breakup…
Why can’t Yahoo shareholders sue?
Yang passed up a big premium for this? They have admitted that despite Billions in revenue, they cannote innovate. Move on.
If Yahoo isn’t dead by 2010, and in fact, is earning the same or more, and keeping their user base, I wonder if Arrington will publically admit he was wrong, or better yet, put his money where his mouth is, and donate $1 million to charity if he’s wrong.
you know, when yahoo and google quit pretending they’re not hot for each other and just start dating, i’m calling that tech brangelina “yahoogle”.
One possible way to mitigate some of the danger of Google’s monopoly. Unhinge adwords from Google Search. To get FTC approval of this deal, Google has to promise that their search results will never take into account whether a publisher website displays adwords advertising, and will never punish a publisher or downgrade its search position when the page contains a competitive advertising platform.
Google currently uses its anti-thin-affiliate tools to kill the rankings of sites with CJ or other advertising on the site. As a publisher of thousands of vertical market sites, with high dependence on natural search we are afraid not to have adwords on any page we want well ranked.
Adsense pay-per-click is a poor revenue model for a decent site. Eventually you’ll see more and more publishers move to CPA/direct referral/leadgen/embedded transaction models and away from adsense. Today, that’s a harder choice to make because it can kill your search position.
Google should not be allowed to control both. Near monopoly control over both natural search and site monetization is destructive. Force them to unbundle and the web will be healthier going forward.
Michael has a voice that the FTC might hear.
Dear Yahoo
Atleast go out with a bang, something that would f up Google and Microsoft wood be great.
If the FTC did nothing to stop the MS monopoly, there is little chance they are going to do anything to Google. This kind of talk just shows what hypocrites “free market” entrepreneurs are. They’ll whine about government interference, regulation, and increased taxes, until they are out-competed, and then they run to the nanny government.
Jim Cramer was all gung-ho Randian libertarian prior to the sub-prime meltdown, then he was crying for the government to come rescue his investment buddies.
thanks.
It’s bullshit that a successful Icahn board slate could trigger the change of control payment. That’s a big f**k you to shareholders. Mgmt throwing in another deliberate roadblock to shareholder interests. After whiffing on offers of $40, $37, $31 and $33, it makes me cringe every time Yang and Bostock cite shareholder value maximization. I still can’t figure out what shareholders he’s referring to. Although I get why Bostock thinks Yang is doing a good job. At least YHOO stock has held up better than Northwest, where he is also Chairman.
YHOO should be a good test case on director personal liability. I hope Icahn pushes the issue.
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The deal is that Google’s PPC tech will be used by Yahoo for SERP ads vis a vis AdSense for search and content. That means Google AdWords advertisers can potentially have the same ads displayed in Google SERPs and Yahoo SERPs. That means more bang for buck for existing PPC advertisers. It does NOT make it more competitive. The deal makes it less competitive. It’s quite simple. I would love to see better PPC tech from Yahoo & MSN, but as an advertiser and marketing consultant, AdWords is better for advertisers and for ROI. But there’s a smugness and hidden arrogance in Google to basically say, Yahoo and MSN’s PPC sucks balls – we know it, advertisers know it, SEO & PPC agencies know it – so let this happen and it’ll be GREAT for advertisers around. AdWord prices are not getting lower – going higher. Goo-Hoo is not a good thing in the LONG RUN. Good short term though.