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Yahoo-Google: Microsoft left searching

The software maker's effort to strengthen its position in online advertising appears to have had the opposite effect, driving Yahoo into Google's arms.

After attempting to join forces with Yahoo in a bid against Google, Microsoft instead has brought its two rivals closer together.

The company not only failed to reach a deal to either buy Yahoo or its search business, but late Thursday Yahoo announced, as expected, a deal that will allow Google to place ads next to Yahoo search queries.

So where does that leave Microsoft? Essentially, the company is exactly where it started, trying to go it alone against Google. Except now, Google will have a little bit more revenue, assuming Yahoo and Google can get antitrust approval for their arrangement.

The two companies appear braced for a fight on that front. "Although Google and Yahoo are not required to receive regulatory approval of the deal before implementing it, the companies have voluntarily agreed to delay implementation for up to three and a half months while the U.S. Department of Justice reviews the arrangement," Yahoo said in a statement.

The deal is non-exclusive and Yahoo indicates it is also open to displaying ads from other third parties, though it is unclear if the economics are in place for that to benefit Microsoft. Moreover, the deal with Google would appear to leave open the door for a Microsoft acquisition, but at a cost. The terms of the Google deal allow Yahoo to terminate it in the event of a change in control, but also require a $250 million breakup fee.

As for other options for Microsoft, analysts have previously said the software maker could for other deals or acquisitions, such as Time Warner's AOL unit or one of the big social networking sites. It is unclear, though, whether any other deal would help the company build significant scale in search, the area where the bulk of online ad money is today and the area where it has most struggled to gain ground against Google.

Microsoft already has a deal to provide ads on Facebook as well as a small stake in that company. News Corp.-owned rival MySpace has an ad deal with Google.

The company has also tried other strategies to boost search share, mainly trying to give economic benefits to consumers that use its engine, such as its Live Search Club, which briefly boosted share as well as a new Live Search Cashback program that pays money to those that buy goods via paid ads in its search engine.

In another blow, Google and Yahoo are also agreeing to make their instant messaging programs interoperable. (Microsoft and Yahoo already have an IM interop pact.)