Nov. 5 (Bloomberg) -- Yahoo! Inc. Chief Executive Officer Jerry Yang will probably have to go back to the negotiating table with Microsoft Corp.

Yang's options are dwindling after Google Inc. scrapped an agreement today to place ads on Yahoo's Web pages. Yahoo's track record of declining market share and stagnant cash flow suggest Yang can't go it alone, said Mark Mahaney, an analyst at Citigroup Inc. in San Francisco.

``The results are extremely disappointing over a long period of time,'' said Mahaney, rated the top Internet analyst by Institutional Investor magazine. ``The market now does not believe that the company can turn around the business organically.''

Yahoo advanced 4.3 percent today in Nasdaq trading on speculation the company will reopen discussions with Microsoft. The other option is for Yahoo to pursue an acquisition of Time Warner Inc.'s AOL. Buying AOL won't give Yahoo the same payoff as the agreement with Google, said Jeff Lindsay, an analyst at Sanford C. Bernstein & Co. in New York.

``The only path really left for Yahoo at this point is to do a deal with Microsoft,'' said Lindsay, ranked third among Internet analysts by Institutional Investor. He predicts Microsoft will offer about $20 a share for Yahoo next year.

Yahoo, based in Sunnyvale, California, also faces slowing growth in online advertising. The credit crisis may cost the industry $6.7 billion in lost sales through 2010, curbing growth to less than 20 percent next year, according to Collins Stewart Plc. Even Redmond, Washington-based Microsoft is exposed.

Microsoft Pressure

``The pressure on Microsoft to do something with Yahoo is even greater than it was last year,'' Lindsay said.

Microsoft will probably delay overtures to Yahoo until next year so it only has to deal with one political administration, Lindsay said. Microsoft walked away from its bid of as much as $47.5 billion for Yahoo in May after the company asked for a higher price.

Yahoo rose 57 cents to $13.92 at 4 p.m. New York time in Nasdaq Stock Market trading. Google lost $24.70, or 6.7 percent, to $342.24.

Yahoo said it is disappointed Google decided to walk away from the agreement. The Justice Department indicated it would seek to block the arrangement, Yahoo said. Yahoo described the deal as ``incremental'' to its product plans and said it will continue to develop Internet-search services.

Yang, 39, still plans to speak today at the Web 2.0 Summit, a conference in San Francisco, said Brad Williams, a Yahoo spokesman. Yang is scheduled to appear at 4:50 p.m. local time.

Legal Battle

``Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners,'' Mountain View, California-based Google said in a posting on its blog. ``That wouldn't have been in the long-term interests of Google or our users, so we have decided to end the agreement.''

Microsoft spokesman Frank Shaw declined to comment on speculation the company could re-enter discussions with Yahoo.

``The Department of Justice's finding is significant for advertisers, publishers and consumers, who voiced overwhelming concern about this illegal deal to law enforcement and policy makers,'' Microsoft said in a statement.

Google handled 62.9 percent of U.S. Web queries in September, according to researcher ComScore Inc. Yahoo had 20.2 percent of the market, followed by Microsoft with 8.5 percent.

Selling the search business to Microsoft would increase Yahoo's operating cash flow by $725 million a year, Imran Khan, an analyst with JPMorgan Chase & Co. in New York, said last week in a note. The company would lose about $694 million in sales while saving $1.4 billion of expenses related to the unit, he said.

To contact the reporter on this story: Vivek Shankar in San Francisco at vshankar3@bloomberg.net

Last Updated: November 5, 2008 16:10 EST