Yahoo reaches search partnership with rival Google


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After breaking off talks with Microsoft, Yahoo said today it had reached a long-discussed Web search advertising partnership with rival Google. The deal could add $800 million a year to its revenue, Yahoo said in a statement.

Ads brokered by Google will appear alongside some of Yahoo’s search results and on some of its Web pages, Yahoo said. The Sunnyvale, Calif., Internet company said the deal was non-exclusive, meaning it was free to strike deals with other ad providers, and that it maintained the right to choose which search queries and Web pages Google’s ads would accompany.


The companies said they didn’t have to receive regulatory approval but would wait for 3 1/2 months before kicking off the partnership so that the Justice Department could review the arrangement. The deal is likely to face heavy regulatory scrutiny.

Microsoft had first wanted to acquire Yahoo, then to buy its search business, to try to catch up to Google in the lucrative Web advertising market. But it ended up driving Yahoo into Google’s arms.

In April, Yahoo and Google conducted a two-week test in which Google served up ads alongside Yahoo search results. Google earns more money for every search query, so outsourcing some of its operations to Google would boost Yahoo’s revenue.

Microsoft is likely to oppose such a deal on the grounds it would harm competition, the company has said. In a statement, Microsoft also said it remained open to discussing a more limited deal with Yahoo. The U.S. Justice Department is reviewing the test the two companies conducted.

Herb Kohl, chairman of the Senate Antitrust Subcommittee, issued a statement within minutes of the announcement:

We will closely examine the joint venture between Google and Yahoo announced today. This collaboration between two technology giants and direct competitors for Internet advertising and search services raises significant competition concerns. The consequences for advertisers and consumers could be far-reaching and warrant careful review, and we plan to investigate the competitive and privacy implications of this deal further in the Antitrust Subcommittee.


Yahoo shares sank 10% to $23.52 today. The company released a statement saying it had ended talks with Microsoft after the two couldn’t reach a deal for a full acquisition or a search spinoff. Microsoft, which said it didn’t want to buy Yahoo anymore, saw its shares rise almost 4% to $28.24.

Yahoo faces rising pressure as it fends off billionaire Carl Icahn, who is fighting for control of the company. Icahn, who couldn’t be reached for comment today, is trying to oust Yahoo’s board and demote CEO Jerry Yang for their handling of the failed Microsoft negotiations. As of May 15, Icahn owned 10 million Yahoo shares and options to buy 49 million.

Yang, who co-founded the company, must convince shareholders that he has a viable plan to grow Yahoo’s business and reverse declining growth. The company’s plan to outsource some of its search business to Google has faced criticism from some investors and analysts. Yahoo has contended that doing so would boost sales. But analysts such as Jackson Securities’ Brian Bolan said advertisers would just move all their business to Google.

-- Jessica Guynn