Yahoo! Makes the Right Decision

There is more to life than a Panama stamp on your passport. Yahoo! (Nasdaq: YHOO  ) agreed to acquire the 80% of interactive ad exchange Right Media it doesn't presently own in a $680 million deal that was announced this morning. 

Snapping up privately held Right Media is the right thing to do. It will give Yahoo! the data it needs to make the company smarter about providing online marketing services.

"The acquisition of Right Media will build upon Yahoo!'s leadership in online advertising," reads this morning's press release. But that's a stretch. Yahoo! is no longer a leader in Internet advertising. It's been chasing Google (Nasdaq: GOOG  ) for some time now. The Panama upgrade to its paid search product is really just Yahoo! aping its larger colleague's methodology for assigning ad priority. And even this morning's buy of Right Media is a response to Google's recently announced $3.1 billion deal for DoubleClick.

You can't be a leader if you're a perpetual follower, right?

Two wrongs don't make a Right   
Losing ground to Google with every passing quarter is painful. Right Media won't change that, but at least Yahoo's putting its generous cash balance to better use than simply collecting passive interest income as Google's heels get smaller and smaller in front of it.

Right Media operates a popular platform where advertisers, publishers, and ad networks are able to shop around for more effective marketing solutions. Without the exchange, advertisers and publishers typically turn to a single ad network to fill their excess inventory. There is often a lack of transparency in the practice, according to Right Media.

The exchange consists of 20,000 buyers and sellers, presently swapping 4 billion daily impressions. Publishers are able to award their unused ad space to the highest bidders. Advertisers can cherry pick exactly where their ads will go and know what they will be paying. Even ad networks can get in on the fun, as sometimes they are the ones with the more attractive bids. In short, the system works.

Right Media success stories include the improved monetization  of the non-premium inventory of Monster's (Nasdaq: MNST  ) Tickle.com personality quiz site and helping LookSmart (Nasdaq: LOOK  ) better utilize its unsold ad impressions.  

Power to the peephole
Yahoo! shareholders don't need their company to overtake Google to win. The market is pegging a $38 billion market cap on Yahoo!, while Google is approaching $150 billion. Investors can nearly double their money if Google holds steady and the market ultimately perceives that Yahoo! is worth at least half of Google.

How can Yahoo! get there? It will have to be through online advertising. Smaller rivals like IAC's (Nasdaq: IACI  ) Ask.com and Microsoft's (Nasdaq: MSFT  ) MSN don't have that kind of pressure. Microsoft's bread and butter business is its software products. IAC runs dozens of other content and service websites.

Yahoo! is the Google rival that has hitched its horse to the online advertising post. The jury is still out on the Panama upgrade that was incorporated earlier this year, but the initial results have been disappointing. That is putting more pressure on Yahoo! to deliver now or bequeath the silver medal.  

Right Media doesn't come cheap. Yahoo! acquired a 20% stake for just $40 million six months ago. This morning's $680 million cash and stock deal for the remaining 80% chunk implies that the value of Right Media has shot up from $200 million to $850 million since October. Still, with Google outbidding Microsoft for DoubleClick, it was bound to bump up the asking prices of interactive marketing specialists like Right Media and ValueClick (Nasdaq: VCLK  ) .

The acquisition of Right Media will help in more ways than simply creating incremental ad revenue and giving the company a way to move more of its own non-premium ad space. That 20,000-name Rolodex will be pretty valuable. No, Yahoo! isn't going to migrate the exchange members over to its own platform. Those 20,000 members joined the exchange because they didn't want to be shackled to a single ad network in the first place.

However, having access to the way free markets dictate how 4 billion daily impressions are vetted will make Yahoo! a smarter online marketing services provider. A bigger brain may be the portal's biggest defense -- and ultimately soundest offense -- against Google.

So, yes, Yahoo! made the right call this morning. As fate would have it, it just happened to be the Right call too.

Yahoo! is a Motley Fool Stock Advisor newsletter selection. Microsoft is an Inside Value recommendation. Both newsletter services are soundly beating the market, and you can find out why with 30-day trial subscriptions. It would be the "Right" thing to do.

Longtime Fool contributor Rick Munarriz is a fan of online exchanges, as long as the exchange doesn't involve his email being flooded with hate mail. Then again, he can usually handle it. He does not own shares in any of the companies in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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