Google, Yahoo! Ink Search Pact

NEW YORK Yahoo! broke off negotiations with Microsoft and turned instead to its arch nemesis Google for assistance.

The two companies have struck a deal allowing Yahoo! to display Google ads with some search results. The agreement covers results on Yahoo!’s search service and on its publisher network in the U.S. and Canada.

Yet Yahoo! is attempting to maintain control of its search ad listings in accordance with its stated belief that the search and display marketplaces will converge. The agreement is non-exclusive, which allows Yahoo! to determine on which pages Google’s results will appear. The company did not disclose the criteria it would use to determine which searches are matched with Google results, but hinted they would cover “tail” searches that apply mainly to small businesses.

“We wanted to make sure we’d have control in the advertiser segments we’re comparable with or superior in performance,” Yahoo! president Sue Decker said during a conference call.

The deal is structured to overcome antitrust scrutiny, since together Google and Yahoo! represent more than 80 percent of the market. In fact, Google could maintain that percentage if Yahoo!’s share dips below a level that makes it cost-efficient to buy, said Bryan Wiener, CEO of 360i, a New York digital agency.

“This partial outsourcing is going to be greeted by marketers as a confusing message about whether they’re in this for the long term,” he said. “It hurts the perception of them being an integrated search and display platform.”

The agreement came soon after Yahoo! said it had cut off negotiations with Microsoft, which had previously offered to buy the firm for $44 billion. (The two companies subsequently negotiated an agreement short of a merger that would give Microsoft control of Yahoo!’s search business.)

In the midst of its protracted negotiations with Microsoft in the wake of the unsolicited bid, Yahoo! ran a test with Google to display the latter’s ads next to less than 3 percent of its search results.

Yahoo! executives have been torn over giving up control of search. Their strategy for the company is based on the convergence of search and display ads. In an interview last week, Decker said, “We’d be open to anything as long as it’s consistent with our convergence model.”

Google makes as much as 30 percent more per search than Yahoo!. With the new system in place, Yahoo! said it expects to generate $250-450 million in additional cash flow.

In a statement, Microsoft pointed out that its negotiations with Yahoo! would have valued it above $33 per share. Yahoo! shares closed for the day at $23.50.