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Talks have officially broken down between Yahoo (Nasdaq: YHOO) 
and Microsoft (Nasdaq: MSFT) 
over a potential merger. Instead, Yahoo has struck a partnership to have Google (Nasdaq: GOOG) handle some of its search advertising sales .
The two firms met on June 8 at a private airport in Silicon Valley, and Microsoft representatives made it clear the software maker was no longer interested in pursuing a bid -- even at its original offer price, which Yahoo had repeatedly rejected as too low.
Microsoft remains interested in a partial deal that involves buying only Yahoo's search business, but Yahoo says such a move would put it at a disadvantage as the various parts of the online advertising world converge in the future.
'Time to Move On'
The portal quickly followed up word it was done talking with Microsoft by disclosing it has signed what it calls a nonexclusive partnership with Google that it said could boost revenue by US$800 million a year and add as much as $450 million in cash flow.
The moves may bring an end to months of high-stakes drama and behind-the-scenes maneuvering, or may turn the focus to new venues, including the Department of Justice, which will review the Google-Yahoo deal for possible antitrust implications.
"Clearly, it's time to move on," said Yahoo chief executive Jerry Yang.
The news sent Yahoo stock lower in morning trading Friday, with the stock down almost 7 percent to $22.00. Microsoft and Google appeared to be the big winners in the eyes of investors, gaining almost 4 percent each to $29.34 and $575, respectively.
Googling Yahoo - Eventually
Microsoft issued a statement saying its alternative transaction -- buying part of Yahoo -- "remains available for discussion." Another key player in the drama, Carl Icahn, did not formally comment on the latest developments, and it's unclear whether he will continue to press his proxy battle to win control of Yahoo's board.
The Google-Yahoo deal does have a clause that calls for Google to receive a payment of at least $250 million and includes language that makes the deal severable if either party changes ownership.
Attention now turns to whether the Google and Yahoo partnership will pass regulatory muster. The companies voluntarily put a delay on implementing the partnership until the U.S. Department of Justice reviews the arrangement, even though they believe no approval is necessary.
Microsoft is expected to press for a close review, given that combined, the two companies will control close to 90 percent of the U.S. search market. Early Friday, U.S. Senator Herb Kohl, who chairs the Senate Antitrust Subcommittee, said the deal "raises important competition concerns" and would be reviewed for competitive and privacy implications.
"Microsoft is going to apply a substantial amount of pressure to ensure Google is treated the same way they were," Enderle Group Principal Analyst Rob Enderle told the E-Commerce Times. "Google is effectively blocking Microsoft, and at Google's scale, this could be seen as restraint of trade. This could flip the switch and have regulators start treating Google like a monopoly."
Tipping the Scales?
The added traffic and revenue of the Yahoo deal may be enough to tip the scales of perception toward Google, which long ago outgrew its impish startup image.
"They have been aggressively trying to put Microsoft out of business, and while that is fine when you are the smaller player, in this space they are massively dominant, and the rules change -- as Microsoft discovered themselves -- when a company gets this dominant," Enderle added. "I do think there is a substantial [regulatory] risk, especially since Microsoft has expanded their presence on Capitol Hill massively over the last few years."
Google has already been in contact with regulators and will work to answer questions raised by the transaction, the company said in a post to its official blog. "Ultimately, we believe that the efficiencies of this agreement will help preserve competition," Omid Kordestani, Google's senior vice president of global sales, wrote in the post.
Room to Grow
Under the terms of the 10-year deal, Yahoo will select and control which search terms are farmed out to Google for search advertising placement. That will enable it to continue to serve its own advertising through its Panama system on more premium content and leverage Google's larger reach in the search-ad space to boost monetization of lower-profile search phrases. The deal is nonexclusive as well, meaning Yahoo could serve ads from other third parties.
The open-ended nature of the deal is interesting, with contextual advertising in areas other than search possible and Yahoo possibly delivering display ads -- its area of strength -- back to Google one day, Sterling Market Intelligence Founding Principal Greg Sterling told the E-Commerce Times.
"Yahoo is positioning itself as an ad exchange, including search," he said. "We'll have to wait and see whether it only benefits Google or helps both companies."
Ironically, Yahoo helped make Google the giant it is today by using its search technology back in 2000, he noted. "That was well before Google became the most powerful brand in the online world."
Now, the question is whether Yahoo can -- with Google's help -- get its value back into the $33 per share range of Microsoft's offer. If it cannot, Icahn's efforts to spur bolder moves by the portal may still find significant support.
"Microsoft just has not lost interest in negotiating with Yahoo -- they have soured the well, so to speak," Enderle said. "They likely would still chat with Carl, but there is no upside to their doing a deal right now, and they would be better off waiting until the dust settles."
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