San Francisco, June 13, 2008 – IRS/NYT – How the situation it is hard to predict. Microsoft’s four-month-long courtship of Yahoo has finally thrown Yahoo into the arms of their biggest common rival, Google as per New York Times.

Google and Yahoo said on Thursday that they had reached an agreement under which Google would deliver ads next to some of Yahoo’s search results and on some of its Web sites in the United States and Canada.

The non exclusive deal is aimed at giving a lift to Yahoo’s finances, and the company said it would generate an additional $250 million to $450 million in operating cash flow in the first year.

The agreement will also strengthen Google’s dominance over the lucrative search advertising market. It was signed after Yahoo rejected a proposal by Microsoft to acquire both Yahoo’s search business and a minority stake in the company. The rejection appears to end months of on-again, off-again negotiations between the two companies.

“Clearly it is time to move on,” Jerry Yang, Yahoo’s chief executive, said in a conference call. “This agreement with Google helps us to do so,” Mr. Yang added, saying that the deal would allow Yahoo to continue to compete in its two main lines of business, search and display advertising.

Wall Street was less confident, sending Yahoo’s shares down more than 10 percent, to close at $23.52, after the announcement that there would be no deal with Microsoft — not for the $47.5 billion it initially bid for all of Yahoo, or a smaller deal for any part of it.

The deal is certain to draw scrutiny from antitrust regulators, and the companies have agreed to delay it for three and a half months to give the Justice Department time to review it. Senator Herb Kohl, a Democrat from Wisconsin who is chairman of the Senate antitrust subcommittee, said his committee would closely examine the venture.

The deal is also likely to become fodder in the heated battle between Carl C. Icahn, the activist investor, and Yahoo for control of the company. Mr. Icahn has said that if Microsoft could not be persuaded to renew its bid for all of Yahoo, he would push for Yahoo to complete a search advertising deal with Google. He did not return calls seeking comment on Thursday.

In a statement, Microsoft said that its offer to buy Yahoo’s search business was still valid.

Under the agreement with Google, Yahoo will choose search terms for which Google will offer ads. Yahoo will determine the number and placement of ads sold by Google and mix them with some ads it sells itself.

“We think of it as backfilling with Google monetization, rather than outsourcing,” Mr. Yang said in an interview.

The four-year agreement, which can be renewed for two terms of three years, will allow Yahoo to continue to invest in improving its own search and search advertising business, Yahoo said. It can be rescinded by either party after a “change in control,” like an acquisition, so it would not necessarily deter Microsoft from bidding again.
A Google co-founder, Sergey Brin, said in an interview that the company was happy to have Yahoo as an advertising partner but refused to discuss Google’s expected financial gain from the deal.
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