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Yahoo Cuts Deal with Google

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After failing to come to terms with Microsoft, and with antitrust regulators hovering in the background, Yahoo has gone and cut that death-defying deal on search advertising with arch-rival Google saying the agreement could clear $800 million in annual revenues. 

The deal is non-exclusive, applies only to paid search and text ads, and is supposed to run for four years with an option to renew for up to 10 years. 

Any change in Yahoo ownership during the next two years would nix it provided the acquirer antes up a $250 million termination fee, which may give Carl Icahn and his proxy fight to dislodge the Yahoo board some pause. 

Yahoo said it should see $250 million-$450 million in incremental operating cash flow in year one. It declined to detail the revenue split. 

In a statement that should enrage Yahoo stockholders Microsoft claimed that the deal it offered Yahoo to buy just its search business would have brought investors better than $33 a share and still left Yahoo standing. 

Reuters said Microsoft offered $35 a share for a 16% equity stake in Yahoo as part of the alternative deal. 

According to the deal with Google Yahoo gets to decide which search terms are used and where the Google ads run alongside its search results and some of its web sites in the US and Canada. 

They ran a successful test in April. The new arrangement kicks off in September after Yahoo emerges from its shareholders meeting and possible showdown with Icahn August 1. 

The pair claims that the deal doesn’t need regulatory approval, but is voluntarily giving the Justice Department three-and-a-half months to review it. The European Commission doesn’t come into the picture at all. 

Microsoft of course has claimed that such an arrangement would be anti-competitive. Regulators themselves have voiced concern. The chairman of the Senate antitrust subcommittee said it would review it. 

Google CEO Eric Schmidt suggested the Yahoo-Google deal was a new competitive model. 

To make it easier for regulators to swallow Yahoo and Google ads compete against each other auction-style. Being non-exclusive is also supposed to make it palatable for regulators to digest. 

Google currently controls 76% of US paid search; Yahoo’s got 7%.

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