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"By Yi-Wyn Yen\nThe implosion of Yahoo&amp;#8217;s ad partnership with Google may or may not lure Microsoft back to bid on Yahoo, but one thing is clear: Making a deal with Yahoo will be a lot less expensive that it was six months ago.\nYahoo \n\t\t\t\t\n\t\t\t\t\t\n\t\t\t\t\t\tYHOO\n\t\t\t\t\t\t\n\t\t\t\t\t\n\t\t\t\t\n\t\t\t is back on the market after Google \n\t\t\t\t\n\t\t\t\t\t\n\t\t\t\t\t\tGOOG\n\t\t\t\t\t\t\n\t\t\t\t\t\n\t\t\t\t\n\t\t\t on Wednesday bailed on the controversial search ad agreement. Investors signaled their approval of the breakup by sending Yahoo\u2019s shares up 5% to $14.02 in mid-day trading.\nMicrosoft \n\t\t\t\t\n\t\t\t\t\t\n\t\t\t\t\t\tMSFT\n\t\t\t\t\t\t\n\t\t\t\t\t\n\t\t\t\t\n\t\t\t had no comment on the possibility of opening up renegotiations with Yahoo. But the software giant was pleased with the Justice Department\u2019s decision to nix the Google-Yahoo deal, which would have allowed Yahoo to run some of Google\u2019s search ads on its Web properties.\n\u201CThe Department of Justice\u2019s finding is significant for advertisers, publishers and consumers, who voiced overwhelming concern about this illegal deal to law enforcement and policymakers,\u201D said Brad Smith, Microsoft\u2019s general counsel in a statement.\nMicrosoft may have won a victory over Google, its bitter rival, but the real loser here is Yahoo. Wrote Jefferies analyst Youssef Squali in a client note, &amp;#8220;In our view the GOOG withdrawal is another black eye for [Yahoo CEO] Jerry Yang and Co.&amp;#8221;\nAnalysts say they expect Yahoo&amp;#8217;s best option is to go back to Microsoft for a search deal. Summed up Jefferies&amp;#8217; Squali, &amp;#8220;YHOO is left with 3 options: 1) go it alone, 2) merge with AOL, or 3) do a deal with Microsoft.&amp;#8221;\n&amp;#8220;Option #1 is not optimal,&amp;#8221; he continued, &amp;#8220;as shareholders would need to ride out the current recession to get paid. Also having Icahn on the board should make status quo difficult. Option #2 is possible but not to our liking since YHOO would double-down on Display (the weaker segment) with no material benefit to search. Option #3 is the most likely,in our view.&amp;#8221;\nGoogle\u2019s ditching of the deal is a humiliating blow for Yahoo. Google announced in a company blog post \u2013 a blog post! &amp;#8211; that battling the feds in court to save the Yahoo deal was too risky. Three minutes after the Google blog was published, Yahoo released a statement that the company was \u201Cdisappointed that Google has elected to withdraw from the agreement rather than defend it in court.\u201D\nThe Justice Department notified Google and Yahoo Wednesday that it would sue both companies if the pair went through with the ad agreement.\u00A0 Wrote Google\u2019s chief legal officer David Drummond in the blog post, \u201CPressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners. That wouldn&amp;#8217;t have been in the long-term interests of Google or our users.\u201D\nYahoo scrambled to keep the deal afloat. Earlier this week, Yahoo proposed a drastically-scaled version to Google and the government. Yahoo offered to reduce the terms from ten years to two years and only run a quarter of Google\u2019s search ads on Yahoo\u2019s sites.\nAnalyst Jeffrey Lindsay with Bernstein Research argues that Yahoo was desperate to keep the Google deal going to stay independent. He also says that without the extra cash generated from Google, Yahoo&amp;#8217;s attempts to buy Time Warner&amp;#8217;s AOL \n\t\t\t\t\n\t\t\t\t\t\n\t\t\t\t\t\tTWX\n\t\t\t\t\t\t\n\t\t\t\t\t\n\t\t\t\t\n\t\t\t business outright is unlikely. Reports have suggested that Time Warner, Fortune&amp;#8217;s parent company, would be willing to sell AOL for $6 billion to $8 billion. Lindsay says that at most, Yahoo can only pay between $4 billion to $4.5 billion without diluting its own shares. &amp;#8220;Without the Google deal, Yahoo can&amp;#8217;t afford to buy AOL,&amp;#8221; Lindsay said.\nYahoo brushes off claims that the Google deal is a major loss to the company. Yahoo had originally said that it could make as much as $800 million in annual revenue from the deal. But in its release Wednesday, the company argues that the deal was only \u201Cincremental\u201D to its turnaround strategy. \u201CThe fundamental building blocks of a stronger Yahoo in both sponsored and algorithmic search were put in place independent of the agreement,\u201D the company said in its statement.\nYahoo struck the search deal with Google four months ago after it ended talks with Microsoft. The move was widely seen as a way for Yahoo to appease shareholders, who were upset that Yahoo turned down Microsoft&amp;#8217;s $33-per-share bid. Microsoft had also offered to buy just Yahoo&amp;#8217;s search business for a reported $2 billion in June.\nMicrosoft is still struggling to make a dent with Google&amp;#8217;s dominance in paid search advertising. Analysts say that&amp;#8217;s all the more reason for Microsoft to come back. &amp;#8220;We can&amp;#8217;t see why Microsoft wants Yahoo any less than it did nearly a year ago,&amp;#8221; Bernstein&amp;#8217;s Lindsay said. &amp;#8220;All the same reasons still hold true for why Microsoft needs Yahoo. And now they can offer considerably less.&amp;#8221;"^^<http://www.w3.org/2001/XMLSchema#string>
<http://fortune.com/2008/11/05/with-google-gone-will-microsoft-come-back-to-yahoo/>