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Yahoo Quits Microsoft, Scores Google Search Deal

After months of drama, Yahoo has issued a statement announcing that talks with Microsoft about a liaison are over. A formal search partnership with Google has been inked, with Yahoo outsourcing search monetization to Google in a 10-year deal.

Microsoft made an unsolicited takeover bid for Yahoo in February. Yahoo declined, setting off months of media drama between the two companies.

In May, Microsoft raised its bid for Yahoo and made a final offer, which Yahoo again declined, driving some shareholders to sue the company for mismanagement. (Maverick investor Carl Icahn is also trying to replace Yahoo’s board of directors.)

Following its final refusal to sell the company, Yahoo and Microsoft announced they were discussing another potential transaction, perhaps one in which Microsoft purchases Yahoo search.

Yesterday’s statement from Yahoo shuts the door on Microsoft entirely. Microsoft shall neither buy the company, nor its search components.

After this news, shares of Yahoo’s stock fell about 12 percent — to $22 — from the beginning of the day.

Yahoo’s statement follows:

With respect to an acquisition of Yahoo’s search business alone that Microsoft had proposed, Yahoo’s Board of Directors has determined … such a transaction would not be consistent with the company’s view of the converging search and display marketplaces, would leave the company without an independent search business that it views as critical to its strategic future and would not be in the best interests of Yahoo stockholders.

Yahoo often referred to the best interests of its shareholders during Microsoft’s drawn-out pursuit and Icahn’s attempts to oust its board. But many shareholders expressed contempt for the spurned deal, arguing Yahoo CEO Jerry Yang let his emotions get the better of him.

In any case, the Microhoo days are over. Shortly after, Yahoo announced a formal search relationship with Google (via Bloomberg).

In a 10-year deal for the U.S. and Canada markets, Yahoo will outsource its sponsored search and contextual ad business to Google. Advertisers can expect “less competition and higher prices,” AdAge writes.

The relationship is non-exclusive; Yahoo may also display sponsored results from its Panama platform or any other third party. But search marketers argue Google ads will almost always win dominant placement over Yahoo’s or any third-party’s, simply because its algorithm is superior, writes MarketingVox.

This may encourage marketers to defect from Yahoo’s proprietary search and contextual ad offerings entirely, putting all their business in Google’s hands. (Google already handles about two-thirds of search in the U.S.)

In April, Google and Yahoo conducted a two-week sponsored search partnership. The results were purportedly so good that a potential long-term relationship between the two generated pushback from cause and minority groups. The Justice Department is also examining the liaison.

Yang says Yahoo and Google agreed to wait three months before implementation while the agreement is examined. The partnership could bring $450 million in operating cash flow to Yahoo’s coffer in the next 12 months.