Yahoo Broadens Ad Pact with Google

Not two hours after announcing the end of merger negotiations with Microsoft, Yahoo said it had reached a deal to carry Google search ads on some of its results pages in the U.S. and Canada.

The deal is an expansion of a two-week test undertaken earlier this year, and a tacit acknowledgment that those tests had proved Google could monetize its search inventory far better than Yahoo’s year-old Panama search advertising platform. Even so, Yahoo stressed the deal is non-exclusive and it will continue to monetize ads through Panama and “other third parties.”

The move is a painful concession for Yahoo, which has invested years and untold development resources in Panama. Its hand was forced by shareholder outrage over CEO Jerry Yang and his board’s decision to spurn Microsoft’s $33 per share offer, which valued Yahoo at a 72 percent premium over the company’s market value at the time.

According to its statement, Yahoo expects to earn additional cash flow of $250 million to $450 million within a year of implementing Google’s ads on its pages.

“This agreement provides a source of funds to both deliver financial value to stockholders from search monetization and to invest in our broader strategy to transform display advertising and advance our starting point objectives with users,” said Yahoo President Sue Decker in a statement.

Under the agreement, Yahoo will carry ads purchased by Google advertisers on terms and results pages of its choosing. It may also carry Google ads on non-search pages. The agreement lasts for up to four years, and consists of an initial four-year term followed by options for two three-year renewals.

Some have speculated a Google-Yahoo tie-up on search advertising could create a virtual monopoly for Google. According to Nielsen Online, Google already controls nearly 70 percent of the search ads market.

Google and Yahoo said they will delay implementing the agreement for up to three and a half months while the U.S. Justice Department reviews it.