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Yahoo! CEO Ready to Resume Microsoft Talks

"If I were Yahoo!, I would ask myself would this deal now make sense?" Boova says.

Sanford Bernstein analyst Jeffrey Lindsay says the agreement with Google had been one of two best shots for Yahoo! -- the other being a possible merger with Time Warner's (TMX) AOL division. But now, neither of those options is likely to happen.

"Without the Yahoo!-Google deal, there aren't enough synergies in a Yahoo!-AOL combined entity to reach Time Warner's asking price," Lindsay wrote in a recent report.

For Google, a search deal with Yahoo! had never been considered a huge money maker but more of a strategic decision to block a combination between Microsoft and Yahoo!, which would conceivably be more competitive in search as a combined entity. Google maintains about 63% of the search business, compared to about 8.5% for Microsoft and about 20% for Yahoo!.

Lindsay estimates that Google would have generated only about $50 million a year in revenue from the search deal with Yahoo!. That's nothing compared to the legal costs it would have incurred to fend off a challenge from the Justice Department, not to mention the deep scrutiny of its business practices.

Boova says that a merger between Yahoo! and Microsoft will still be subject to regulatory review, but it will be less vulnerable than a deal with Google, given Google's domination over its competitors.

"A combination with Google and anyone else is going to draw the most scrutiny," he says.

Boova maintains that Microsoft must have had confidence that a merger with Yahoo! would hold up, otherwise it wouldn't have taken a chance in the first place.

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