Will the Google-Yahoo Deal Happen? Who Knows?

According to a just-posted story in the Journal, the likelihood that Google and Yahoo will walk away from their controversial search advertising deal has risen, as talks with the Justice Department have not produced an agreement on terms the companies and the government can both live with.

This isn’t very surprising, since the fact that talks have gone on this long—more than four months after the two companies proposed the deal for Yahoo to run Google search ads on some of its pages—has suggested in recent weeks that it might not happen after all. But according to sources at both companies I talked to late yesterday, talks were continuing. And according to Google just minutes ago, they are still going. Spokesman Adam Kovacevich issued this statement: “We are continuing to have cooperative discussions with the Department of Justice about this arrangement and agreed to a brief delay in implementing the agreement while those discussions continue. We are confident that the arrangement is beneficial to competition, but we are not going to discuss the details of the process.”

Still, it seems pretty certain the issue will come to a head quite soon. Between a new administration likely to result in changes in personnel at Justice, Google’s desire to either do the deal or go on, and struggling Yahoo’s immediate need for the revenues that would come from it, it would seem none of the parties wants to delay this much longer.

The deal has become a political hot potato, pitting Microsoft and its extensive and experienced lobbying force in Washington against smaller teams at Google and Yahoo. By many accounts of antitrust experts I’ve talked to, Justice would have a hard case to win outright. But neither Yahoo nor Google likely wants this to come to a lawsuit at all. For Google, especially, already under increasing regulatory scrutiny, such a battle could have much worse consequences than the loss of what is for it a fairly small amount of revenues compared with its overall sales.

For Yahoo, however, the deal was not only a significant profit boost—up to $450 million annually in operating cash flow—but it was a bargaining chip vs. Microsoft potentially coming back with an acquisition offer for far less than the $33 a share, or $47 billion, it offered earlier this year to buy Yahoo. Sources indicate there are no talks between the two companies currently. Yahoo has a bigger stake in making this happen, even with restrictions the government might demand.

So the longer this stalemate goes on, indeed, the less likely the deal will happen. I suspect we’ll know very soon.