The chances of Yahoo! becoming a takeover target increased last night as shares in the struggling internet group fell sharply on a sixth consecutive year-on-year fall in quarterly profits and lowered forecasts for the rest of the year.

The stock was down more than 4 per cent in New York after-hours deals, wiping about $1.5 billion (£731 million) off the company's market value, after the group said that second-quarter profits had fallen to $160.6 million, from $164.3 million for the same period a year earlier.

Revenues were up 8 per cent at $1.7 billion, badly lagging growth in the overall online advertising market and the recent performance of Google, the market leader.

The figures were doubly disappointing as this was the quarter when Yahoo!’s expensively revamped search-advertising platform, Panama, was supposed to kick in.

Analysts said that the slumping stock price raised the chance of a potential bidder emerging for the group, valued last night at about $35.5 billion.

This year Microsoft was cited as a possible buyer.

The shares have lost more than 30 per cent of their value, wiping about $20 billion from the company’s market value, since the end of 2005.

Jerry Yang, the co-founder who replaced Terry Semel as chief executive last month, said: “I am very aware of the challenges we face … There is a significant gap where we are today and where we need to be.”

He wrote on his blog: “I believe that Yahoo! is too often defined by the competitive landscape, rather than by what we can accomplish with our assets. I’m determined for us to define our own path.”

The pressure on Mr Yang, who also announced a 100-day review into Yahoo!, a process that could result in disposals and in which he has promised there will be “no sacred cows”, is likely to be ratcheted up this week when the arch rival Google reports results.

Google’s revenue leapt 63 per cent in the first quarter and analysts expect a similarly strong performance in the second.

The overall online ad market is expected to grow by about 30 per cent this year, according to eMarketer, the research group.

EMarketer estimates that Google will take 27.4 per cent of the $22 billion US advertisers will spend online this year, up from 24.3 per cent in 2006.

Yahoo!’s share has fallen to 16.3 per cent, from 17.8 per cent.

Options on the table for Mr Yang could involve a takeover by Microsoft or an effective merger of Yahoo! with MySpace, the social networking site owned by News Corporation, the parent company of Times Online.

Commenting on last night’s results, analysts suggested time is already running out for Mr Yang, who was previously a key advisor to Mr Semel. Jordan Rohan, the RBC Capital Markets analyst, said: “This is growing old. I would like to see more immediate changes. Things are looking pretty bleak right now.”

Kevin Kelleher, of the GigaOM technology site, wrote: “This is what it’s like for Yahoo! these days: Trying to feel pretty good about meeting already lowered expectations. And then lowering future expectations even further.”

He added: “Any turnaround will be slow, and it may be we see another less-than-remarkable quarter before [the company] can be said to have turned things around. If they don’t, a slumping stock will only raise the chances of a buyout.

Yahoo! executives suggested last night that the impending overhaul of Yahoo! wouldnot involve deep job cuts.

The overhaul follows a string of high-profile departures, open dissent in the ranks and several missed acquisitions.

After subtracting commissions paid to its advertising partners, Yahoo! expects full-year revenues in a range between $4.89 billion and $5.19 billion.

In April, the full-year forecast anticipated revenue from $4.95 billion to $5.45 billion.

Business Editor James Harding on Terry Semel

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