Microsoft's plan to establish a strong footing in online advertising last night suffered a blow as merger talks with Yahoo finally failed. Yahoo also said it would allow Google to sell search ads on its site.
Separate statements from Microsoft and Yahoo signalled a rift between the two after their on-off talks, and Yahoo shares fell 10% as final hopes of a full or partial acquisition faded.
Yahoo said it had agreed to let Google put search ads - advertisements placed next to search results - on its site in a move it said would boost cash flow by up to $450m in the first 12 months.
Google and Yahoo, the numbers one and two search engines, will pit ads against each other in auctions for the ad that pays the most.
The process is non-exclusive, meaning others could join in the bidding to place ads, a factor that could make a deal easier to win approval from competition regulators.
Yahoo rejected Microsoft's latest proposal, which sources said included an offer to buy 16% of Yahoo for $35 per share, plus to buy its search business. Yahoo said an alternative Microsoft proposal to buy only its search business did not fit into its plan to expand search and display advertising.
Microsoft's offer for a minority stake was at a premium per share to its early May offer to buy the entire company for $47.5 billion, or $33 per share.
Microsoft had hoped a Yahoo deal would accelerate its ability to capitalise on Web advertising growth and compete with Google, which is increasingly fighting for the same internet audience.
Yahoo shareholders - including billionaire Carl Icahn - have been pressing Yahoo to reach a deal with Microsoft. Icahn has called for chief executive Jerry Yang to be ousted.
