Google-Yahoo Deal: What Went Wrong?

Includes: AABA, GOOG
by: Ron Haruni

On Wednesday, after much speculation, Google (NASDAQ:GOOG) ended its controversial Internet search advertising deal with Yahoo (YHOO) that was originally announced in June of this year. Mountain View, Calif.-based Google described the departure as being amicable and recognized the fact that the deal was canceled as a result of pressure from U.S. regulators.

Apparently, Google didn’t have much choice but to withdraw from the pact to avoid having a tediously protracted legal battle with U.S. regulators. The Justice Department, in a statement issued on Wednesday, said it had told internet’s search giant that it planned to file a lawsuit to block the implementation of the deal on antitrust grounds. The partnership would have created a high concentration of market power into one entity.

Last week, both search giants scaled back the terms of their search advertising deal in what looked like a last-ditch attempt to get approval from U.S. regulators. Some analysts called it the Band-Aid deal, while others said it smacked of desperation.

Yahoo meanwhile, sees Google’s walking away from the agreement with dissatisfaction. In a statement, the company expressed its disappointment that Google had “elected to withdraw from the agreement rather than defend it in court.” For Yahoo, this is another major blow since it had expected to earn up to $450 million in operating cash flow annually from the deal.

Google for its part reiterated the fact that it would not allow the prospect of a legal fight to distract it from its core mission. The company is the runaway leader in Internet search advertising. Yahoo is a distant second.

The full statement by Google’s David Drummond on the matter can be found here.

At the time of writing Yahoo, shares were up 7%, on the expectation that Microsoft (NASDAQ:MSFT) might be returning with a new deal.

Disclosure: None

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