Google Pulls The Plug On Yahoo Advertising Deal

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After vowing repeatedly to go through with its search advertising deal with Yahoo no matter what the Justice Department does, Google reversed course today and pulled the plug on the deal. Chief legal counsel David Drummond writes:

. . . after four months of review, including discussions of various possible changes to the agreement, it’s clear that government regulators and some advertisers continue to have concerns about the agreement. Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners. That wouldn’t have been in the long-term interests of Google or our users, so we have decided to end the agreement.

We’re of course disappointed that this deal won’t be moving ahead. But we’re not going to let the prospect of a lengthy legal battle distract us from our core mission. That would be like trying to drive down the road of innovation with the parking brake on.

Apparently, the recent revision of the deal’s terms to cap the amount of Yahoo’s revenues generated by Google at 25 percent was not enough to satisfy the Justice Department. And Google threw up its hands, giving up the fight.

The intransigence of the DOJ made the deal untenable. There was no longer enough upside to put up with all of the antitrust scrutiny the deal would continue to bring.

And then there is the Microsoft factor. The only reason Google offered the deal in the first place was to help Yahoo fend off Microsoft’s takeover advances earlier in the year. It is a different world now. Microsoft seems to have moved on. The financial markets have collapsed. Yahoo is going to have to fix its own problems.

Interestingly, Yahoo’s stock is up nearly 5 percent to $14 on the news (while Google’s is down 2 percent to $358). Is that because Yahoo’s destiny is once again in its own hands, or because Microsoft can now make another run at the company?

Microsoft was the biggest opponent of the deal, and its lobbying efforts seem to have paid off. It can now buy Yahoo for a much cheaper price than it originally offered (one analyst suggests $20 a share, compared to the $33 Microsoft once offered), and Yahoo has nowhere else to turn (except AOL, which isn’t doing so great).

Update: Yahoo is not happy with Google’s decision:

Yahoo! continues to believe in the benefits of the agreement and is disappointed that Google has elected to withdraw from the agreement rather than defend it in court. Google notified Yahoo! of its refusal to move forward with implementation of the agreement following indication from the Department of Justice that it would seek to block it, despite Yahoo!’s proposed revisions to address the DOJ’s concerns.

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