Google and Yahoo! in final stages of sealing search deal

LONDON - Google is set to shore up its dominance of the internet search market and leave rival Microsoft out in the cold as it closes in on a deal with struggling Yahoo!.

Google and Yahoo! are in the final stages of inking a deal that would combine their search advertising systems -- a partnership that will face intense scrutiny from competition authorities on both sides of the Atlantic.

The deal comes as Yahoo! chief executive Jerry Yang is under pressure from investors, led by Carl Ichan, to do a deal with Microsoft.

The software giant abandoned its $44.6bn (£22.6bn) bid for Yahoo! last month, which it tabled in January, after refusing to raise its offer.

Microsoft returned with an alternative proposal after Icahn bought a significant stake in Yahoo! and began to talk up the advantages of selling the company to Microsoft.

Icahn and Steve Ballmer, chief executive of Microsoft, have both claimed that Yahoo! was pursuing a partnership with Google as a "poison pill" to block Microsoft's advances, which is a view shared by many in the industry.

The agreement will enable Yahoo! to run ads supplied by Google alongside its own search results and on some of its websites in the US and Canada.

Google accounted for almost 75% of internet searches in the UK in April, while Yahoo! had just 4.4%, with Microsoft on 3.5%, according to figures from comScore.

The move comes after an announcement that Yahoo! had called off talks with Microsoft, which it has never come close to agreeing terms with.

The most recent discussions centred on Microsoft paying more than $7bn (£3.6bn) for a 16% stake in Yahoo! and taking over its search business.

However, Yahoo! decided it was important to retain search, which it considers critical to its strategic direction.

Despite a deal between Yahoo! and Google nearing completion, hedge fund investors in the US are continuing to argue that an eventual acquisition by Microsoft was still the most likely outcome of Yahoo!'s attempt to bolster its flagging position in search.

At the time of writing, Yahoo!'s shares were down 10.06% to $23.52, while Google's had risen 1.42% to $552.95. Meanwhile, Microsoft, saw its shares rise 4.13% to $28.24.