Aug. 5 (Bloomberg) -- Wall Street is jeering Yahoo! Inc. Chief Executive Officer Carol Bartz for the deal she cut with Microsoft Corp. last week. The blame is misplaced.

Yahoo shares plummeted 12 percent the day the Microsoft agreement was announced, as investors noted the absence of the “boatloads of money” Bartz had hoped for in the form of upfront payments from Microsoft. The din grew so loud that Microsoft CEO Steve Ballmer found himself insisting that no, the deal isn’t really as sweet for his company as people may think.

For better or worse, though, Bartz had little choice but to hand Yahoo’s Internet search business over to Microsoft. For that she can thank Jerry Yang, her predecessor as chief executive, who turned out to have been the best friend that Ballmer -- and Microsoft shareholders -- could have asked for.

It was just 18 months ago that Ballmer made his unsolicited offer of $31 a share, later increased to $33, for Yahoo. Yang, the Yahoo co-founder who had taken the reins after the departure of Terry Semel, couldn’t face the prospect of surrendering his baby. He ultimately fought off the Microsoft proposal by demanding a price even higher than the generous 62 percent premium that Microsoft was offering over Yahoo’s share price the day before the bid was publicly disclosed on Feb. 1, 2008.

One global financial crisis and market upheaval later, Yahoo shares stood at $14.34 on Aug. 3, giving it a market capitalization of $20 billion, compared with the $47.5 billion Ballmer had been prepared to pay.

Sparing Shareholders

By failing in his takeover bid, Ballmer spared himself, not to mention his shareholders, what would undoubtedly have been a painful slide in the value of the putative asset. The dog that catches the car, be careful what you wish for -- you can almost hear the cliches that would have been flying around Microsoft headquarters right about now.

Instead, Ballmer gets much of what he wanted from the arrangement: greater scale and new opportunities for Microsoft’s now-revived search business to take on Google Inc. in what the Interactive Advertising Bureau estimates is the $10.5 billion U.S. market for search-based advertising. He also avoids the distractions and pain of having to integrate the two companies.

Some analysts had expected Yahoo to receive anywhere from $1.5 billion to $7 billion upfront as part of any accord. Instead, the 10-year deal calls for Microsoft to provide the search technology for Yahoo sites, while Yahoo will keep 88 percent of the revenue from ads sold against the results for at least the first five years. The companies said Yahoo will eventually see about $500 million a year in additional operating income while saving $200 million in capital costs.

Little Leverage

Bartz, the former Autodesk Inc. chairman who became Yahoo’s president and CEO in January, had little leverage in the negotiations. While Yahoo now is in second place in the U.S. search market, with 19.6 percent to Google’s 65 percent, according to market researcher ComScore Inc., it wasn’t going to be in a position to spend the amounts needed to keep up with the Google juggernaut.

Moreover, the absence of a deal would leave Yahoo to fight a two-front war, with the other opponent being Microsoft itself. Riding positive reviews and consumer response -- not to mention an estimated $100 million marketing campaign -- Microsoft’s rechristened Bing search service expanded its market share to 8.4 percent in June from 8 percent in May, the month before its relaunch, according to ComScore.

At Yahoo’s Expense

Significantly, most of those gains came at Yahoo’s expense, not Google’s; Yahoo was at 20.1 percent in May. Given Microsoft’s deep pockets, Bartz was looking at the prospect of a continued erosion of Yahoo’s competitive position that would have kept eating away at the company’s value. And the longer it took to consummate the Microsoft deal, the more the erosion.

Yang had already poisoned the well of what might have been Bartz’s most effective negotiating ploy to extract a better deal from Microsoft: threatening to do a deal with Google instead. Yang went that route as part of his effort to fend off the merger, only to have Google back out when the U.S. Justice Department threatened antitrust action.

How government regulators, especially in the U.S. and Europe, react to the Microsoft-Yahoo deal is just one of the hurdles the accord still faces. Ballmer and Bartz will have their work cut out for them putting together the two search businesses; some employees of each company might find themselves working for the other, and full implementation of the agreement could take two years or more.

Assuaging Investors

Bartz will also have to assuage the angry investors who feel she gave up the unit too cheaply -- her “boatloads” comment, in discussing a possible sale of the search business, may not have been the best choice of words -- or who may have harbored any lingering hopes of an outright sale of the company. At the same time, she will have to cope with internal morale that can’t help but suffer seeing such a key piece of the business being effectively outsourced.

But the pummeling she is getting, if understandable, is also unfair. She isn’t the one who created the mess; she’s the one who has to try to clean it up.

If she does, and a strong and thriving Yahoo eventually emerges from the current carnage, she will have at least partially vindicated Yang’s resistance to the Microsoft takeover. Right now, though, it’s hard to see how Yang did his shareholders -- or Bartz -- any favors.

Microsoft’s shareholders, by contrast, owe him a hearty thank-you.

(Rich Jaroslovsky is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Rich Jaroslovsky in New York at rjaroslovsky@bloomberg.net.

Last Updated: August 4, 2009 21:00 EDT