As Microsoft and Yahoo! squabbled their way into an impasse, the clear winner is Google. The market-leading search engine is left with two competitors, one of which - Yahoo! - has shown a willingness to let Google handle its own search engine advertising.

No wonder Steve Ballmer, the chief executive of Microsoft, complained about the proposed Google-Yahoo! link. In his parting letter to Jerry Yang, his counterpart at Yahoo!, Mr Ballmer said that the deal would “consolidate market share with the already-dominant search provider in a manner that would reduce competition”.

That is not sour grapes. If Yahoo! starts (and is allowed by regulators) to resell Google search ads, it has thrown in the towel. Advertisers are already desperate for competition to Google.

Yahoo!’s decision to talk to Google reflects an admission that it cannot beat its rival. Three years ago, Google’s share of all searches in America stood at 35 per cent. Today, it is 59 per cent and rising. Yahoo! has fallen from 32 per cent to 22 per cent, and Microsoft is also struggling, falling from 16 per cent to 10 per cent.

In the UK Google’s share is more like 85 per cent. It is even higher on continental Europe. Only in China and Japan is Yahoo! competitive, although it does not control its operations in those markets. But Yahoo!’s failure to compete is broad and is reflected in the stock price. As Chris Liddell, Microsoft’s chief financial officer pointed out last week, its stand-alone strategy took its stock price down to $19, a level last seen in 2003.

The pressure now is on Jerry Yang at Yahoo! Microsoft’s decision to walk, after upping its bid by $5 billion to around $33 a share, is brave, but right and may turn out to be a good negotiating tactic. Yahoo! shares will tumble today and the company will be hit by the usual lawsuits – while Microsoft has spared itself a fight to nominate its own directors and avoided a hostile takeover battle. Had Microsoft ploughed on at $33 a share and lost a shareholder vote, its strategy would have been in tatters. Now, Mr Ballmer can leave Yahoo! to show what, if anything, it can do.

Yahoo!, meanwhile, has got what it wanted. It never appeared willing to negotiate seriously, apart from a flurry of activity at the end. Its decision to seek refuge in a disagreement over price would be more credible if Mr Yang and others at Yahoo! were not so emotionally hostile to Microsoft. Had Microsoft paid $33, that would amount to 24 times this year’s forecast earnings before interest, tax, depreciation and amortisation, and at such high multiples Yahoo!’s attempt to push Microsoft to $37 seems greedy.

Nor did Yahoo! manage to get anywhere in negotiations with potential white knights, Time Warner and News Corporation, parent company of The Times. A tie-up with AOL and MySpace units would have done much for Yahoo!’s traffic and prospects in display advertising, but would not solve its problem with search. Whatever happens, if Yahoo!’s execution is not flawless, Mr Yang may yet be holding more talks with Mr Ballmer. Don’t rule out a deal in the future with an even stronger Google.

Countdown to a corporate stalemate

February 1: Microsoft says its $31-a-share cash and stock offer to shareholders, a 62 per cent premium, values Yahoo! at $44.6bn. Microsoft threatens to try to oust Yahoo! board if members refuse to yield. Eric Schmidt, Google's chief executive, offers to help Jerry Yang, CEO of Yahoo!, to fight off Microsoft.

February 11: Yahoo! rejects Microsoft's offer

February 19: Yahoo! releases details of severance plans that could make the deal more expensive for Microsoft

March 5: Yahoo! in talks with Google, News Corporation and AOL

April 5: Microsoft gives Yahoo! three weeks to agree on a buyout

April 26: Microsoft deadline for Yahoo! to accept the offer expires. Both companies remain silent

May 3: Microsoft raises bid to $33, but Yang says the board won't accept less than $37. Microsoft withdraws its offer

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