November 6, 2008 2:00 am

Google jilts Yahoo rather than fight competition case in court

Google has abandoned its search advertising partnership with Yahoo in the face of an antitrust lawsuit aimed at blocking the deal.

The US justice department had been reviewing the agreement, announced in June, and said yesterday it had informed both companies that it would file a suit to prevent its implementation.

The deal meant more to Yahoo and its embattled management team than Google. In a statement, Yahoo said it was "disappointed that Google has elected to withdraw from the agreement rather than defend it in court".

Yahoo had been seeking to placate shareholders dissatisfied with its performance with the promise of significant revenues from the deal, which is in addition to merger talks with Time Warner for its AOL division. With the Nasdaq down 3 per cent in midday trading, Google shares were off 4.75 per cent, while Yahoo shares gained 6.3 per cent to $14.19 on speculation that Microsoft would now return with a takeover offer.

"The stock is up because people are thinking: it's not Google, it's not AOL, it's going to be Microsoft," said Scott Kessler, IT analyst at Standard & Poor's Equity Research.

"I think that's reasonable, given the circumstances, for people to expect some kind of partnership between Microsoft and Yahoo as good for both companies and potentially inevitable, to some extent."

Yahoo and Google began an experiment of placing Google ads within some of Yahoo's search results in April. The alliance was seen as an attempt to present an alternative to the Microsoft offer for Yahoo. Microsoft withdrew a $33 per share offer, worth $47.5bn (£29.7bn), in May.

Google and Yahoo announced their search advertising agreement the following month. Yahoo described it as an $800m annual revenue opportunity that would generate $250m-$450m in incremental operating cash flow.

The Silicon Valley company said yesterday it had proposed revisions to the deal that addressed antitrust concerns. These were understood to include limiting the deal to 25 per cent of Yahoo's paid search revenues and cutting its term from 10 to two years.

The justice department said the two companies accounted for at least 90 per cent of the online search advertising and search syndication markets and the deal was likely to harm competition.

Strategic dead end, Page 29

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