Google Ends Search Advertising Deal with Yahoo

After four months of wrangling with the Justice Department, Google has ditched its search advertising deal with Yahoo. The move, announced unilaterally by Google, had been widely expected in recent days, despite last-minute concessions by the two companies this week to mollify the concerns of antitrust regulators. They reportedly proposed a shorter term and a cap on revenue for the deal, under which Yahoo would run Google ads on some of its pages.

But advertisers, publishers, and other players, notably rival Microsoft, continued to fear that the combined efforts of Google, the dominant force in search ads, with No. 2 Yahoo would stifle competition and lead to higher ad prices. Google executives decided they weren’t going to win this one, and they opted not to engage in a legal battle for what was, after all, a small amount of money for Google. “After four months of review, including discussions of various possible changes to the agreement, it’s clear that government regulators and some advertisers continue to have concerns about the agreement,” said Google Chief Legal Officer David Drummond. “Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners. That wouldn’t have been in the long term interests of Google or our users, so we have decided to end the agreement.” He added that the prospect of a lengthy legal battle “would be like trying to drive down the road of innovation with the parking brake on.”

Update: In a press release, Justice actually says it informed the companies it would file an antitrust lawsuit to block the deal. So it’s quite understandable Google decided to bail, especially since such a threat was one of the outs provided for in its Yahoo deal. So Google not only avoids a bruising fight with regulators, but a cash settlement with Yahoo for exiting the deal.

For Yahoo, however, this is a huge blow, since it has said it expected to earn up to $450 million in operating cash flow annually from the deal. In its statement, in full after the jump, Yahoo said it was “disappointed that Google has elected to withdraw from the agreement rather than defend it in court.”

Oddly enough, its stock is up about 4% in early trading, likely on the expectation of Microsoft returning with a new deal. Several analysts have suggested that if the deal failed, Yahoo would be forced to go back to Microsoft, which had initially made an offer to buy all of Yahoo and then to buy its search ad operations, both rejected by Yahoo. Today, Yahoo’s stock stands at under $14 a share, far below the $31 a share Microsoft originally offered and a sweetened $33 a share offer.

The stock spiked briefly as much as 10% after a rumor circulated by a broker claimed that Yahoo cofounder and CEO Jerry Yang would leave and Microsoft would make another offer to buy all of Yahoo. But people close to the companies deny both claims, and say there are no current talks.