-- It's back to the drawing board for Yahoo yhoo.
The ailing Internet company, which had been banking on a search advertising alliance with Google goog, has been left at the altar. Tech analysts say now it must work out a deal of some kind with Microsoft, whose $47.5 billion takeover offer Yahoo spurned earlier.
On Wednesday, Google dropped out of a proposed partnership that would have shown some Google ads on Yahoo pages. It did so because "it's clear that government regulators and some advertisers continue to have concerns," Google Senior Vice President David Drummond said on a company blog.
The Justice Department told the companies it would sue to block the agreement on antitrust concerns. Yahoo says it will go forward solo, but tech analysts don't think that's realistic.
"Investors have punished Yahoo for not taking the (Microsoft) offer the first time around," says Greg Sterling, an analyst at Sterling Market Intelligence. "They can't wait out the recession and hope things turn around."
According to measurement firm ComScore Media Metrix, Yahoo's market share in search fell to 19% in August, from 23% the year before. Google's grew to 63% from 56%.
Competitors aren't faring much better. Microsoft's MSN was down to 8% in August, from 11% the year before; AOL fell to 4.3% from 4.5%. "Microsoft msft is losing hundreds of millions of dollars every quarter on its search business," Sterling says. "Microsoft has a lot to gain by joining forces with Yahoo."
Microsoft, in a statement, hailed the end of the Yahoo-Google deal but declined further comment.
Scott Kessler, an analyst at Standard & Poor's, says Yahoo is worth about $15 billion, based on its current stock price.
The $47.5 billion Microsoft once offered "was a fair offer at the time," he says. "Back then, Microsoft needed Yahoo more than Yahoo needed Microsoft. Now it's a different story."
JPMorgan analyst Imran Khan, in a note to investors, suggests Yahoo should just sell its search business to Microsoft. Yahoo's current initiatives "will not prevent further declines," Khan says.
While Yahoo needs to make a deal to satisfy investors, the perception that Yahoo is failing is a misnomer, Kessler says.
Many executives have fled, and the company has announced a 10% job cut. Yet in September, Yahoo had 141 million online visitors, second to Google's 144 million, according to ComScore.
"People have become hugely irrational in some of their thinking and conclusions about Yahoo," Kessler says.