Microsoft Corp. turned to Internet pioneer Yahoo Inc. for help in fighting its biggest-ever competitive threat, then only made that threat stronger.
Yahoo and Microsoft on Thursday said they had ended nearly five months of merger and partnership talks born of the software giant's frustration with falling far behind Google Inc. in online advertising.
Yahoo shares plunged more than 10% to $23.52.
But after the stock market closed, the Sunnyvale, Calif., company turned around and struck an online advertising alliance with rival Google. Yahoo said it would get a financial boost by using Google's superior system for placing text ads next to its search results and on some of its Web pages.
The deal between the top two search engines triggered objections from antitrust groups, which said advertisers in effect would lose a major alternative for touting their wares. Consumer groups warned of an increased risk to privacy, and an influential senator pledged to investigate.
Yahoo and Google said they would delay the start of their partnership by as much as 3 1/2 months to give the Justice Department a chance to scrutinize the deal.
For Microsoft, analysts said, the tie-up was the worst possible outcome of the unsolicited, $44.6-billion bid it made to buy Yahoo more than four months ago.
Advertisers pay Google each time someone clicks on one of the text ads it brokers. With Yahoo, Google will get its ads on one of the world's most-visited network of websites, while denying Microsoft the chance to do the same.
"There is no hope for Microsoft in the search space," said Brian Bolan, an analyst with Jackson Securities.
Still, investors were relieved that Microsoft wouldn't have to shell out so much money to acquire an Internet company that is also struggling to keep up. Its shares rose more than 4%, to $28.24, after Yahoo said talks had ended.
Microsoft, based in Redmond, Wash., continues to dominate the markets for operating system software that runs personal computers and productivity tools such as word-processing and presentation programs.
But Google, of Mountain View, Calif., controls the lucrative search-advertising market. The company is bumping up against Microsoft in an increasing number of fields, which already include Internet banner ads, e-mail and software for advanced cellphones.
