(Agencies)
Updated: 2008-05-06 14:44

Microsoft courted Yahoo to capitalize on the rapidly growing market for Internet advertising, one that has long been served by Yahoo's search, e-mail and Web communities.

It is also trying to fend off the expansion of Google, which has made inroads into Microsoft's home turf with a portfolio of Web based-applications, e-mail and messaging.

But now that a deal has fallen apart, Google has emerged as the key beneficiary. Shares in the company rose 2.3 percent.

"Google has just kept their foot on the accelerator," said Derek Brown, analyst at Cantor Fitzgerald. "Neither Yahoo nor Microsoft in their current state seems to be a material competitive threat."

Yahoo is likely to press alternative strategies in coming weeks, including a search advertising partnership with Google and a deal for Time Warner Inc's AOL Internet unit.

A Google deal would boost Yahoo's operating performance in the near term, but runs the risk of regulatory scrutiny over an alliance between the Internet's top two players.

Google and Yahoo are hammering out the intricacies of a potential deal and also are sharing their plans with antitrust regulators, a person close to Google who was not authorized to speak publicly on the matter said.

In a letter to Yang over the weekend, Ballmer warned that any deal between Yahoo and Google would be difficult to unravel and would preclude an agreement with Microsoft.

Yang told Reuters the company would take care to structure any new efforts to "preserve as much (as possible) long-term flexibility for Yahoo, both operationally and strategically."

Shareholder pressure

Analysts expect a flurry of shareholder lawsuits against Yahoo, and say it may even face direct pressure on its board.

Already, some Yahoo shareholders have started to question how talks were handled.

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