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Yahoo!, eBay in Search, Ad Pact

Updated from 8:47 a.m. EDT

Yahoo! (YHOO - Get Report) and eBay (EBAY) cut an alliance Thursday to fight the growing threat posed by Google (GOOG - Get Report).

Yahoo! will provide graphical and search advertisements on eBay, and will promote eBay's PayPal payment business to its merchants and publishers. The companies will also jointly market a toolbar and develop click-to-call telephone services.

Wall Street responded favorably to the alliance because both Yahoo! and eBay are feeling intense pressure from Google, and sent shares of eBay up $2.65, or 9%, to $32.85 (the shares were upgraded by Prudential earlier). Yahoo! jumped $1.41, or 4% to $33.20.

The relationship, which media reports hinted was coming, won't have a material impact on Yahoo! and eBay's financial results this year, the companies said. They will incorporate any financial impact for 2007 when they issue their financial guidance.

"Our consumers will benefit from the combination of Yahoo! and eBay's leading technology and services, providing them with one of the best online experiences," says Yahoo! Chief Executive Terry Semel. "Yahoo! holds a leadership position in all forms of online advertising. This partnership with eBay provides us with a great opportunity to further extend our sponsored search and graphical advertising reach to one of the largest and most active communities on the Web."

Meg Whitman, eBay's chief executive, concurred.

"We are thrilled to be working more closely with Yahoo! and we think this agreement represents a great opportunity to benefit our communities and grow our businesses," she says. "Yahoo! offers an engaged online audience, which drives massive traffic through its rich consumer content and premium services. Working together, we can create more exposure for our properties, which in turn makes them more valuable to our users."

Yahoo! has recently unveiled its plans to improve its search advertising platform, which analysts say may help the company improve its competitive position against Google. Still, market research data continue to show Google gaining share and search while Yahoo!'s position is either flat or declining.

eBay may help Yahoo! bolster its search business since it's one of the largest buyers of keyword advertising. Google's competitive threat to eBay comes from the payment system being developed for its Google Base free listings service. Both companies have downplayed such talk, but investors are concerned that the Google system will squeeze profits from eBay's lucrative PayPal unit.

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