June 12 (Bloomberg) -- Yahoo! Inc. agreed to let Google Inc. sell some of the advertisements it runs alongside Internet search results, seeking to shore up sales after ending talks with Microsoft Corp. about a combination.

The deal may add $800 million a year to sales, Sunnyvale, California-based Yahoo said today in a statement. The companies will delay implementing the program for up to three and a half months to give the U.S. Justice Department time for review.

Yahoo shares sank 10 percent today after the company said talks with Microsoft failed. The partnership with Google may boost the amount of money Yahoo gets when people click on ads, part of Chief Executive Officer Jerry Yang's effort to deflect criticism from investor Carl Icahn, who blamed Yang for scuttling a $47.5 billion bid from Microsoft.

``Abdicating search to Google puts Yahoo in an untenable strategic position in order to obtain short-term gains,'' Soleil Securities Group Inc.'s Laura Martin said in an interview. The Los Angeles-based analyst advises investors to hold Yahoo shares.

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 partnership isn't exclusive, meaning that other companies in addition to Yahoo and Google will be able to sell ads to appear on Yahoo's pages. Yahoo's revenue last year was $6.97 billion.

Yahoo fell 7 cents to $23.45 in extended trading after the announcement. The shares declined $2.63 to $23.52 at 4 p.m. New York time in Nasdaq Stock Market trading. Redmond, Washington- based Microsoft advanced $1.12, or 4.1 percent, to $28.24.

Antitrust Fight

The agreement may set up an antitrust fight over whether it hurts competition. Microsoft has said a deal between Yahoo and Mountain View, California-based Google will put more than 90 percent of the search ad market in Google's hands.

The Senate Antitrust Subcommittee will examine the arrangement, said Chairman Herb Kohl, a Wisconsin Democrat.

``This collaboration between two technology giants and direct competitors for Internet advertising and search services raises important competition concerns,'' Kohl said in a statement.

Google handles almost two-thirds of all searches in the U.S. The company got as much as 70 percent more revenue than Yahoo for each search query at the end of last year, according to Yahoo.

Microsoft's Bid

Microsoft isn't interested in buying all of Yahoo, even at the $33-a-share price it wanted before the end of earlier discussions May 3, Yahoo said today in a separate statement. Microsoft proposed buying just Yahoo's Internet search business, and Yahoo directors declined.

Microsoft offered $35 a share for 16 percent of Yahoo as part of an alternative proposed agreement, according to a person familiar with the situation.

The Yahoo-Google agreement has a four-year initial term, and two three-year renewals, at Yahoo's option. Advertisers will pay Yahoo directly for ad clicks through its Panama advertising system, and pay Google for Google ads that appear on Yahoo's pages. Google will share a percentage of that revenue with Yahoo, according to the statement.

``It will strengthen our company's position in the convergence of search and display'' ads, Yang, 39, said on a conference call. ``An open market is critical to encourage the evolution of online'' advertising.

The deal can be ended by either side if there's a change of ownership at Yahoo or Google. If Yahoo is bought within two years, it will have to pay a termination fee of $250 million. That fee may be reduced by revenue earned by Google from the agreement.

Relevant Results

The agreement will benefit consumers and advertisers by providing more relevant ads for Yahoo users, Google CEO Eric Schmidt said today on a conference call.

Yahoo's additional queries won't produce a large lift in Google's sales, Schmidt said. Google boosts revenue more by making search results more relevant than it does from increasing the volume of queries, he said.

Google began discussing the partnership with Yahoo in February. Schmidt said his talks with Yang intensified in the past few weeks.

``Yahoo was obviously struggling with important decisions,'' said Schmidt, 53.

Analysts and investors, including Gamco Investors Inc.'s Larry Haverty and Jackson Securities LLC analyst Brian Bolan, have said outsourcing may cut into Yahoo's revenue by encouraging advertisers to move all their business to Google.

Icahn's Stance

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 said in a statement today that it's still willing to pursue an alternative transaction short of a full takeover.

Susan Gordon, a spokeswoman for Icahn, didn't return a phone message.

Icahn plans to oust Yang for failing to come to a deal with Microsoft, accusing him of sabotaging talks by adopting a costly employee-severance plan. Icahn has said a Microsoft takeover is the only way the two companies can compete with Google, the leader in Internet search traffic.

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.

Yahoo said today that it has the assets and the strategic plan to capitalize on growth in the Internet advertising market, predicting that annual industry revenue will almost double to $75 billion by 2010.

Yahoo had demanded at least $37 a share from Microsoft as of last month. That's 92 percent more than the closing price on Jan. 31, the day before Microsoft disclosed its initial overtures. Yahoo had reported eight quarters of profit declines prior to Microsoft's bid.

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 12, 2008 20:46 EDT