Rather than face a potential protracted legal battle, Google has decided to opt-out of a deal with Yahoo which was to see Google providing advertising around Yahoo’s search results. This deal would have been worth nearly US$800 million to Yahoo – per year.

Since Yahoo rejected Microsoft’s offer of US$33 per share, Yahoo’s management has been under a lot of pressure from the outside, the inside, and well, pretty much everyone. US$33 per share would have valued the company at roughly US$47 billion – something Yahoo thought was a slap in the face, apparently.

Yahoo has claimed in a statement that they are disappointed with the fact that Google decided to pull out and not continue to move forward and fight for the deal in court. The deal was originally announced earlier this year in June, however, it has faced a lot of objections, including anti-trust issues. Yahoo was relying on the deal with Google as it would have helped placate angry shareholders over the Microsoft deal rejection caused by Yahoo’s Jerry Yang.

Google has claimed no desire to deal with large scale legal issues while trying to focus on its core mission. A Google blog has been quoted as saying “That would be like trying to drive down the road of innovation with the parking brake on.” Although Originally, Google was very Gung Ho about the deal – as cited in previous articles here on Tom’s, we find that Google’s attorneys were hard at work trying to scrape up ‘positive’ public responses to the deal in an effort to make it happen. Quoting a reader from TechCrunch that goes by the name ‘Darren’ (covered in this previous article):

“I received a voicemail from an attorney representing Google yesterday so of course I called back (voicemail attached). We spend about 100K a month on AdWords so we’d apparently been targeted because of that. He was looking for large advertisers who use both Google and Yahoo (we do) who would be willing to provide public testimonials in support of outsourcing Yahoo’s search ads to Google. I told him I’m a free-market competition kind of guy so he tried to address my concerns for about 15 minutes and then called it quits.”

Concerning all the bumps in the original deal, Google and Yahoo are the two largest online search providers – naturally regulators at the US Department of Justice (DoJ) got a little bit concerned over their deal to work together – thus potentially creating somewhat of a monopoly.

Microsoft was quick to object to the deal based on the fact that the two search providers would control 80 percent of the market together – thus driving up rates for online advertising. Google rejected these claims, however, saying that its rates are set by an auction system – rates could climb or flop, even if the deal were not to take place.

The DoJ had informed Google that it would be seeking to file a lawsuit that would effectively block the entire deal all together. This movement ended up causing delays in the deal that was originally to take place in early October. This also struck large interest and objection from various other regulator bodies, such as the California delegation of the U.S. House of Representatives, Association of National Advertisers, and European Union Antitrust Regulators. Covered in this previous article on Toms, we find that Google remained optimistic about the deal – claiming “We have had discussions with regulators and look forward to responding to their questions about this agreement.”

We can clearly see that Google did have its heart set on making the deal work all along, but all the hassles involved seemed to prove too much of, well, a hassle – which ultimately brought Google to its final decision to just drop the whole idea.

It is not like it would be any different if the Microsoft / Yahoo deal went through – it too would have had its share of regulatory and antitrust action involved, as previously covered – and delays as well. Yahoo claimed that they had left the door open for Microsoft after the whole offer collapsed due to Jerry Yang (Yahoo’s Chief Executive and Co-founder) not being satisfied with US$33 per share. Yang still wanted to talk with Microsoft however, but Microsoft still decided to walk away. (More coverage here)

So what happens to Yahoo now? Well, nobody really knows right now, but with everything that has been going on with it lately — rejecting an offer from Microsoft, not hitting annual targets, money not looking so good, stocks dropping off, lay-offs, and now the loss of a deal that would have sent nearly US$800 million per year its way — things just don’t look good. It is not expected that Yahoo would suffer a ‘dot.flop’, but it is going to be an interesting 2009 for the company.