Yahoo and Google may dump their deal

Since The Department of Justice appears ready to challenge a deal for Google (NASDAQ: GOOG) to sell search ads for rival Yahoo! (NASDAQ: YHOO), the two companies may quit while they are ahead. Or behind, depending on who is looking. Regulators are worried that the marriage would create a sort of monopoly on search ads because the two companies have about 85% of that market between them.

If the planned joint initiative fails, it hurts Yahoo! much more than Google. While the larger company would have made some money on sales commissions in the future, Yahoo! needs that revenue to help justify why it should remain independent. Google is also concerned that Justice might consider it a monopoly on its own since it holds a market share in search of about 65%. According to The Wall Street Journal, "By dropping out, Google would likely be seeking to avoid a legal battle that would spotlight its market power."

Observers believe that if Yahoo! cannot set up a Google deal, it is more likely to arrange a marriage with Microsoft's (NASDAQ: MSFT) internet unit or AOL so that it can gain more scale in the online ad market.

Yahoo! also has the very real option of going it alone. That would not be good for investors who put their money in at over $30 a share when Microsoft made a takeover bid, but it could be very good for shareholders who bought in around the current price of $13, making Yahoo!'s market cap only $18 billion. The company has valuable assets including Yahoo! Japan and China e-commerce company Alibaba. Yahoo! also has $3 billion in cash and will probably have an operating profit of well over $500 million this year. It is the largest internet display advertising firm in the U.S.

Yahoo! may simply be best off going its own way. It might surprise investors by doing fairly well.

Douglas A. McIntyre is an editor at 247wallst.com.