Google backed out of an upcoming search advertising partnership with Yahoo! yesterday after a negative response from the regulatory federal government.

The US Justice Department planned to file a lawsuit to block the deal, announcing Wednesday that "Yahoo's competition likely would have been blunted immediately," as Google would have "placed its more lucrative ads on Yahoo searches."
The deal was announced in June but postponed to allow time for government review.

Yahoo said it was "disappointed that Google has elected to withdraw from the agreement rather than defend it in court."

The two companies are the two most powerful on the Internet search engine market, accounting for "more than 80 percent of the web search market in August."

The deal brought about antitrust issues, with advertisers opposing the search partnership for fear of raised prices by the dominant online powers.

Microsoft Corp. also lobbied against the partnership, and has been soliciting for control of Yahoo's assets. Yahoo denies rumors that it is "in talks to sell itself to Microsoft," however, Youseff Squali, an analyst at Jeffries & Co., said that some sort of deal with Microsoft now seems "inevitable," as it is "unlikely" that Yahoo could deliver high profit margins to sustain itself.

Yahoo's shares rose yesterday, as investors hoped the botched Google deal would "lead to a resumption of deal talks with Microsoft."

A Microsoft deal could lead to the "outright takeover of Yahoo," according to strategists.

Source: Reuters