Read the Yahoo! press release in full

Microsoft issues statement regarding Yahoo!

Details of the Yahoo! — Google advertising deal

Yahoo! last night sealed a joint advertising and online search deal with Google after rejecting plans to sell its search business to Microsoft.

While Jerry Yang, chief executive and co-founder of Yahoo!, indicated that the deal would not block Microsoft from returning with another bid, Google and Yahoo! have devised an agreement which would trigger a $250 million break-fee in the event that Yahoo! were acquired by another company within two years.

The deal is expected to draw to a close a disruptive period for Yahoo! which has spent almost five months fighting off two unwanted bid approaches from Microsoft and a subsequent offer to buy a 16 per cent stake in return for Yahoo!'s internet search business.

On a conference call last night, Mr Yang said of the Google transaction: "Clearly it is time to move on", adding that once the deal is completed it is expected to generate additional revenues of around $800 million every year.

Yahoo! said last night that it had already been in talks with the US Department of Justice (DoJ) over whether the deal breached any competition law and that while the transaction was not subject to regulatory approval, both Yahoo! and Google had voluntarily agreed to delay going ahead for three and a half months to allow the DoJ to examine the implications of the tie-up. Under the terms of the deal, Yahoo! will be able to display some adverts that had been sold by Google.

Earlier yesterday, Yahoo and Microsoft said that all talks between them had ended. The two companies had been exploring a deal that would either have seen Microsoft either acquire the whole of Yahoo!, or take a minority, passive stake and buy the group's search engine.

In an earlier statement published last night, Yahoo! said that “after careful evaluation” it had rejected selling either itself whole or just its online search engine to Microsoft because it would not be in the best interests of shareholders.

Microsoft reiterated yesterday that while it had abandoned the prospect of buying Yahoo! outright, it had left the door open for an “alternative transaction”. In the past, that option had included taking a minority, passive stake in Yahoo! and acquiring part of the search business. The two companies are believed to have met last weekend where talks soured further.

It also emerged last night, that Microsoft is believed to have been so desperate to acquire a stake in Yahoo!, it had raised its valuation of the company for the third time to $35 a share.

While the Google-Yahoo! deal was announced after Wall Street had closed, details of the collapse of Microsoft-Yahoo! talks saw shares in Yahoo! fall by 10 per cent to $23.52, well below the $33 a share that Microsoft had offered to pay a month ago as part of its revised $47 billion (£24.1 billion) cash and shares offer.

It was not known whether Carl Icahn, the billionaire activist shareholder who owns at least 4.8 per cent of Yahoo!, was told of the collapse of the Microsoft talks or of the alternative deal with Google. Mr Icahn, who has been preparing to launch a boardroom coup at Yahoo! next month to force the group to merge with the software giant, was not available for comment.

At the end of January, Microsoft sent a letter to Jerry Yang, Yahoo!’s co-founder and chief executive. The company said it wanted to buy the world’s second biggest search engine for $42 billion in cash and shares, representing a 62 per cent premium to the share price.

The deal valued Yahoo! stock at $31 a share. Mr Yang rejected the offer outright, complaining that it was too low. It was also understood the Mr Yang believed the Microsoft culture to be entirely incompatible with that of Yahoo!. Mr Yang sought to join forces with other companies to fend off another approach from Microsoft and began talks with News Corporation, owner of The Times, AOL — the internet arm of Time Warner, and made contact with Google, Yahoo!’s bigger rival.

In May, Steve Ballmer, chief executive of Microsoft, raised his offer by $5 billion in a move that valued each Yahoo! share at $33. Mr Yang refused to consider an offer of less than $38 per share, introduced a poison pill by increasing the severance pay for Yahoo! staff, and threatened to hive off the company's most lucrative assets. Microsoft walked away.

Carl Icahn then sought to force Yahoo! to merge with Microsoft by taking a substantial stake in the company and threatened to oust the board.

Microsoft wants Yahoo! to seize a bigger share of the online advertising market which is worth $40 billion a year. It is expected that web advertising will double in value by 2010.

Microsoft shares rose 4 per cent to $28.24, while Google stock increased 1 per cent to $552.95.

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