Yahoo teaming up with Google as third-quarter results disappoint

Unable to revive Yahoo’s revenue growth on her own, Chief Executive Marissa Mayer is hoping for a little help from her old friends at Google.

Mayer, a top Google executive until defecting to Yahoo Inc. in 2012, announced that the two companies had reached a three-year deal to work together in Internet search and advertising. The pact was unveiled after Yahoo released a disappointing third-quarter earnings report.

The numbers announced Tuesday showed that Yahoo’s revenue, after paying ad commissions, dropped 8% from the same time last year to $1 billion.

It marked the ninth time in the last 11 quarters that Yahoo’s revenue has declined or remained unchanged from the previous year. The ongoing erosion has magnified worries that the Sunnyvale, Calif., company will be stuck in a financial sinkhole after spinning off its lucrative stake in China’s Alibaba Group.

Mayer is still promising to boost revenue and now it appears that Google — the Internet’s most profitable company — may play a key role.

This is Yahoo’s second attempt to lean on Google’s expertise in Internet search and advertising.

Yahoo tried to team up with Google Inc. in search during 2008 as part of its defense against a takeover attempt by Microsoft Corp. The Google alliance unraveled after the Justice Department threatened to block the partnership on the grounds that it would thwart competition.

After being rebuffed, Yahoo wound up negotiating a deal to rely on technology from Microsoft’s Bing search engine. Yahoo will still use Bing, but will also mix in results from Google’s search engine if it can win antitrust approval of its new deal this year.

It may be easier to gain the government’s approval this time because Yahoo’s share of the Internet search market has shrunk in the last seven years. Google’s search engine, though, still processes about two out of every three search requests in the U.S., roughly the same volume as it did when the Justice Department originally objected to a Yahoo partnership.

Yahoo is expecting another tough time in the current quarter ending in December. Revenue, after ad commissions, is expected to range from $920 million to $960 million, an 18% to 22% decline from the previous year. That would be by far the largest quarterly drop in Yahoo’s revenue since Mayer became CEO in July 2012.

Yahoo’s stock, which closed down 67 cents, or 2%, at $32.83 on Tuesday, fell an additional 53 cents, or 1.6%, to $32.30 in extended trading after its results came out.

Investors are now focused on the fate of Yahoo’s plan to place its remaining Alibaba holdings — 384 million shares worth about $28 billion — into a new company called Aabaco Holdings.

Yahoo is doing the spinoff in an effort to prevent the remaining profit from its $1-billion investment in Alibaba from being taxed in the U.S., but it’s now unclear whether that will pan out. The Internal Revenue Service raised doubts by declining to guarantee that the spinoff will protect the Alibaba stake from being taxed.

Despite that setback, Yahoo is planning to complete the spinoff by next year with the expectation that it will qualify as a tax-free maneuver.