Yahoo shares fall with Microsoft out of picture

NEW YORK (Reuters) - Shares in Yahoo Inc (YHOO.O) fell more than 6 percent on Friday as investors doubted a new ad partnership with Google Inc (GOOG.O) would benefit the company after deal talks with Microsoft Corp (MSFT.O) failed.

Yahoo has shed more than 16 percent of its value since late trading on Thursday, when it confirmed that negotiations with Microsoft failed to produce a deal. Google rose 4 percent on Friday, while Microsoft gained 3.5 percent.

Yahoo also unveiled a search advertising partnership that will let it run some Google paid search listings alongside its ads on web sites in the United States and Canada.

While Yahoo called the deal an $800 million yearly revenue opportunity that would add up to $450 million in operating cash flow within its first year, investors were not convinced that it offered a better return than Microsoft's abandoned buyout offer that was last worth $47.5 billion.

"We think the announced Yahoo-Google deal is worth only $3 per share to Yahoo shareholders," Jeffrey Lindsay, analyst at Sanford C. Bernstein, wrote in a research note.

Yahoo has been sued by shareholders and is engaged in a proxy battle with billionaire Carl Icahn over its handling of the negotiations. Analysts said they expected to hear more from disappointed shareholders in the coming days.

"We think at a minimum that the current deal will result in further lawsuits, which Yahoo will ultimately have to settle, further impacting the economics of the deal," Lindsay said.

On the flip side, Google appears to have gained greatly, mainly because the prospect of more serious competition from a combined Microsoft and Yahoo has been neutralized.

RBC Capital Markets analyst Ross Sandler estimated the web search leader could also eventually earn up to $700 million in incremental annual cash flow from the deal.

"Microsoft walking from Yahoo should allow Google to continue to extend its lead in online advertising in the near-term, at the same time, fortify Yahoo's position as the clear No. 2 player," Sandler wrote.

Yahoo fell $1.02 to $22.50. Google rose $20.01 to $572.96, while Microsoft advanced $1.01 to $29.251.

(Reporting by Michele Gershberg; additional reporting by Bijoy Koyitty in Bangalore; Editing by Derek Caney)