Yahoo!, Google Confirm Search Pact

SAN FRANCISCO - Yahoo!(YHOO Quote) confirmed late Thursday it had signed a search-advertising deal with Google(GOOG Quote), subject to regulatory review.

The initial four-year deal, which can be extended to 10 years, has been expected since the two companies tested the arrangement in April. But a contract was put on hold while Yahoo! discussed possibly selling part of its business to Microsoft(MSFT Quote). Those talks ended Thursday.

The deal between Yahoo! and Google, which can be called off after a change in ownership, does not preclude a merger, something Microsoft had sought earlier this year but now says it has no interest in. But a termination fee of up to $250 million throws another barrier in the path of shareholder Carl Icahn, who is angling to replace Yahoo!'s board to clear the way for a sale of the company.

Yahoo! will run ads supplied by Google alongside search results and on some Yahoo! Web sites in the U.S. and Canada. The deal is expected to give Yahoo! a new infusion of revenue, something it is under pressure to do since it snubbed Microsoft buyout offer of $33 a share. Yahoo! executives said on a conference call they expect the arrangement to add between $250 million and $450 million in annual incremental cash flow.

The agreement will not take effect until late September. CEO Jerry Yang said that a commercial arrangement of this type does not require regulatory approval, but both companies have voluntarily agreed to give the Justice Department three and a half months to review the agreement.