June 13 (Bloomberg) -- Yahoo! Inc. Chief Executive Officer Jerry Yang's five-month conflict with Microsoft Corp. ended yesterday. The outcome may not be good for him or the Internet company's investors.

Yahoo said yesterday it scrapped talks after Microsoft refused to pay the $47.5 billion it offered last month. Instead Yang unveiled a partnership with Google Inc. While that deal may add $800 million to annual sales, it may not be enough to push the stock above $30, Canaccord Adams's Colin Gillis said.

``When Microsoft walked, it was a real walk,'' Gillis said. The New York-based analyst recommends selling Yahoo shares. ``This deal has the perception of damaged goods.''

The Google accord may make Yang more vulnerable in a proxy fight against billionaire investor Carl Icahn, who says Yang botched the Microsoft negotiations. Even if shareholders opt to replace the company's directors with Icahn's candidates, Microsoft is no longer showing an interest in buying Yahoo, owner of the second most popular online search engine.

Merrill Lynch & Co. Inc. and Citigroup Inc. cut their estimates on Yahoo's stock price, saying advertisers probably will shift more spending to Google. Yahoo, based in Sunnyvale, California, dropped 5 cents to $23.47 at 4 p.m. New York time on the Nasdaq Stock Market after falling 10 percent yesterday.

Microsoft rose 83 cents, or 2.9 percent, to $29.07. The world's biggest software maker doesn't want to buy all of Yahoo, even at the $33-a-share price it bid before the end of talks May 3. While Microsoft proposed buying just Yahoo's search business, its directors declined.

`Blew It'

Co-founded more than a decade ago by Yang and David Filo, Yahoo had reported eight straight quarters of profit declines before Microsoft's bid and is now relying on its biggest rival for growth.

``This just reaffirms the view that Yahoo, and particularly Jerry Yang and David Filo, blew it,'' said Mark May, an analyst at Needham & Co. in New York. ``It's hard to see how this management team is going to be able to extract or create value anywhere near 33 bucks a share anytime soon.''

Yahoo will allow Google to sell advertising for some of its users' searches in exchange for a portion of the revenue from that advertising. The agreement, which covers sites in the U.S. and Canada, may add as much as $450 million in operating cash flow in the first 12 months, Yahoo said. The agreement isn't exclusive, meaning that other companies besides Yahoo and Google will be able to sell ads that appear on Yahoo's pages.

Deal's Terms

The accord has a four-year initial term, and two three-year renewals if Yahoo requests them. Advertisers will pay Yahoo directly for ad clicks through its Panama advertising system and pay Google when that company's ads appear on Yahoo's pages. Google will share a percentage of the revenue with Yahoo.

Yahoo spokeswoman Diana Wong didn't return a phone message seeking comment.

The Google agreement ``will strengthen our company's position,'' Yang, 39, said yesterday in a conference call. ``We believe that an open market is critical.''

Google was charging advertisers as much as 70 percent more per search as of late last year, according to Yahoo. The sales boost may add $3 to $5 to Yahoo's stock, depending on how the deal is implemented, said Jeff Lindsay, an analyst at Sanford C. Bernstein & Co. in New York. U.S. government regulatory scrutiny of the agreement could siphon away some of that value, he said.

`Closely Examine'

The U.S. Senate Antitrust Subcommittee will ``closely examine'' the arrangement, said Chairman Herb Kohl, a Wisconsin Democrat. Microsoft has said a Yahoo-Google deal would put more than 90 percent of the search ad market in Mountain View, California-based Google's hands.

Yahoo and Google are waiting up to three and a half months to give the U.S. Justice Department time to review the program before they adopt it.

Icahn had said he wouldn't oppose a search partnership with Google if Microsoft refused to negotiate a deal, as long as they could terminate the agreement if Microsoft renewed its advances.

Microsoft, based in Redmond, Washington, said yesterday it's still willing to pursue an alternative transaction, short of a full takeover. Yang said the Google agreement doesn't preclude a new Microsoft deal.

Icahn didn't return calls yesterday. He has been working to oust Yang for failing to make a deal with Microsoft, accusing him of sabotaging talks by adopting a costly employee-severance plan. A Microsoft takeover is the only way the two companies can compete with Google, he says.

Going Back?

``There's always the chance that Carl Icahn is going to drag Yahoo back to the table, but we think the bid walked for quite a bit,'' Canaccord's Gillis said in an interview with Bloomberg Television today. ``Perhaps, if it does happen, it's going to be in six or seven or eight months.''

Icahn owned 10 million Yahoo shares and options to buy 49 million as of May 15. Investors BP Capital LLC Chairman T. Boone Pickens and hedge-fund manager John Paulson are backing his slate of nine directors, which includes himself and former Viacom chief Frank Biondi Jr.

The end of the Microsoft talks could persuade shareholders to back Icahn, said Sanford Bernstein's Lindsay, who expects Yahoo shares to perform in line with the broader market.

``You can't escape the fact that $33 was offered and was turned down,'' he said. ``They're likely to be very disappointed. There'll be an increased impetus for the dissident shareholder groups.''

Microsoft's claim that it's no longer interested in buying Yahoo may hurt Icahn's chances, said Needham's May.

``It probably more diminishes his position than it does enhance it,'' he said. Even so, ``it's going to be hard for Yahoo to come back from blowing what might be, looking back, the major milestone in Yahoo's corporate history.''

To contact the reporter on this story: Crayton Harrison in Dallas at tharrison5@bloomberg.net; Amy Thomson in New York at athomson6@bloomberg.net

Last Updated: June 13, 2008 16:10 EDT