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
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.
The agreement is not exclusive, giving Yahoo! the ability to display paid search results from third parties - which could presumably include Microsoft -- and from Yahoo!'s own Panama advertising platform, the company said in a statement. The agreement applies only to paid search.
Analysts on the call expressed concern that Yahoo!'s current advertisers will bypass it and go direct to Google. But President Sue Decker it would be both Yahoo!'s and its publisher clients' choice as to whether they would participate in the program.
Yahoo! closed Thursday down $2.63, or 10.1% at $23.52 after it said talks with Microsoft had ended with no deal in sight. In extended trading, shares continued their decline until the Google deal was officially announced. Yahoo! shares were up 23 cents, or 0.9%, to $23.73 in recent after-hours trading.
Yang said Thursday that Microsoft's offer to buy part of Yahoo! "would leave the company without an independent search business," which would not be in shareholders' best interests.
While Microsoft has said that a search-advertising deal between Google and Yahoo! would be anticompetitive, Decker said the agreement "enhances competition by promoting our ability to compete in the marketplace where we are especially well positioned: in the convergence of search and display."
The executives emphasized the non-exclusivity of the deal, leaving Yahoo! the flexibility to create similar arrangements with other search platforms and third parties.
Decker also announced that a first release of a new Yahoo! display advertising platform will move into pilots with publishers next week.