By MICHAEL LIEDTKE, AP Business Writer
What began in January as Microsoft's most audacious attack yet on Google instead paved the way for the Internet's most powerful company to gain even more clout through a deal that gives Google access to a large chunk of Yahoo's advertising space.
By submitting to a partnership that endorses Google's search advertising technology as a better choice than its own, Yahoo is giving online marketers even more incentive to spend most of their money with its biggest rival, according to industry analysts.
It looks like such a sweet deal for Google that the U.S. Justice Department and lawmakers are expected to take a hard look at the arrangement to make sure it doesn't give Google too much control over the Internet's search advertising market.
Google currently has about 75 percent of the U.S. search advertising market followed by Yahoo at 9 percent, according to the research firm eMarketer Inc.
Although they contend their alliance won't lessen competition, Google and Yahoo have agreed to wait until late September to begin working together so the U.S. government has more time to assess the potential impact.
Even more importantly to Google, the Yahoo partnership keeps a potentially valuable weapon out of Microsoft's control.
Without Yahoo's renowned franchise, Microsoft once again is scrambling to find a way to fix its unprofitable online operations and narrow Google's commanding lead in the Internet's rapidly growing ad market.
Google shares gained $18.56 to close Friday at $571.51 while Microsoft shares added 83 cents to close at $29.07 — an indication that some investors were relieved the world's largest software maker concluded it would be too expensive and troublesome to buy Yahoo.
On the other side of the fence, Yahoo shareholders had been clinging to the possibility that Microsoft would revive its last offer of $47.5 billion, or $33 per share, to buy the Internet pioneer. But those hopes evaporated late Thursday after Yahoo disclosed Microsoft had "unequivocally" rebuffed an attempt to renew the negotiations.
In a sign of investors' frustration, Yahoo shares dropped as much as $1.77, or 7.5 percent, Friday before rallying late in the session to finish at $23.47, down five cents. The downturn marked Yahoo's lowest stock price since it closed at $19.18 at the end of January, just before Microsoft launched its takeover attempt.
That leaves Yahoo's market value 29 percent below Microsoft's last offer, which was withdrawn May 3 after Yahoo asked for $37 per share. Yahoo's stock hasn't reached that price since January 2006.
At least Microsoft still has a strong, highly profitable backbone — a suite of software products that run most computers around the world.
Yahoo, though, may have made a Faustian bargain by hiring Google to show ad links next to a significant portion of the ad links appearing alongside search results on its Web site in the United States and Canada. The Sunnyvale-based company also will pluck Google ads to show on other Web sites in its marketing network.
Yahoo expects its annual revenue to get an $800 million lift from the arrangement with Google while still showing show the majority of its own ads alongside its own search results. But most analysts viewed it as an act of desperation, asserting it's only a matter of time before advertisers shift all their business to Google because they know their messages will show up on Yahoo either way.
Deutsche Bank analyst Jeetil Patel described Yahoo's decision to farm out advertising to Google as "one of the worst strategic maneuvers seen in the Internet industry."
Google will get such great access to Yahoo's highly trafficked Web site that it should be able to gather more insights about the correlation between search requests and advertising, ThinkPanmure analyst William Morrison wrote in a Friday research note titled "Giving Away The Store (To Google)."
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AP Technology Writer Jessica Mintz in Seattle and AP Business Writer Christopher Rugaber in Washington, D.C., contributed to this story.
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