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WASHINGTON/SAN FRANCISCO (Reuters) - Yahoo Inc and Google Inc have drastically scaled back the scope of their search advertising deal, a person close to the discussions said on Monday, in a last-ditch effort to win U.S. antitrust approval.
The move comes after Google appeared to be on the verge of walking away from the partnership, which was announced in June to foil Microsoft Corp's takeover attempt of Yahoo. The deal has since drawn scrutiny from U.S. regulators amid a growing chorus of criticism from advertisers.
The two Internet companies have submitted a reworked proposal to the U.S. Department of Justice that shortens their partnership to just two years from 10 years, the source said.
The revised deal also caps the percentage of search revenue that Yahoo can collect from Google at no more than 25 percent, and lets Google advertisers opt out of being placed on Yahoo, the source said.
Yahoo spokeswoman Tracy Schmaler said in an emailed statement the company continues to work with the Justice Department and discussions are ongoing.
Google spokesman Adam Kovacevich declined to discuss the details of the process.
Analysts said the new terms could help the deal get past regulators, but questioned whether such a limited partnership would be financially lucrative to Yahoo, which is a distant No. 2 to Google in the web search market.
Mukul Krishna, digital media global director at consulting firm Frost and Sullivan, described the revised terms as "more of a Band-Aid than the extensive surgery that is needed" for Yahoo.
"This sweetens the deal to go through antitrust red flags and gives (Yahoo CEO) Jerry (Yang) some breathing space, but how much money it would add to Yahoo's top line would be very crucial," Krishna said. "And it doesn't answer the question, what after two years?"
Mark May, an analyst with Needham & Co, said Yahoo's willingness to limit the scope of the deal "tells us that other alternatives are either not available or not attractive at all."
Yahoo has been trying to build an independent growth strategy after fending off Microsoft's hostile bid, even as its stock price has plunged to under $13, well below the $31-a-share the software company offered in February.
The first piece of its alternative strategy was to strike a deal with Google, once its archrival. Yahoo also continues to hold talks with Time Warner Inc about buying the advertising and content assets of its AOL division, sources have told Reuters.
In the meantime, several executives have also left Yahoo in recent months amid uncertainty about its future.
Yahoo said on Monday it will appoint Jeff Dossett, a former Microsoft manager, to lead its U.S. media business replacing Scott Moore, who is leaving the company to pursue other opportunities.
Yahoo also said that Alan Warms, the general manager of Yahoo News, is quitting and will be replaced by Neeraj Khemlani, Yahoo's vice president of programing.
The search ad deal, which would let Google place ads alongside Yahoo's search results, was expected to boost Yahoo's cash flow by up to $450 million in the first year, the companies had said in June.
Needham & Co's May said the benefit to Yahoo might be far less -- between $80 million and $100 million -- than the original target, bumping up the web company's share price by only a couple of dollars if regulators let the deal through.
The deal has run afoul of advertisers who fear high prices because Google and Yahoo dominate the U.S. Web search market. Google's market share widened to 63 percent in August, while Yahoo dropped to 19.6 percent and Microsoft slipped to 8.3 percent, according to comScore Inc.
"It sounds like they are addressing legitimate concerns of the Justice Department," said Evan Stewart, an antitrust attorney with Zuckerman Spaeder LLP. "This is a negotiation ... It sounds like it's getting closer."
The revised deal terms were first reported by The Wall Street Journal.
While the Justice Department does not comment on pending merger matters, there had been hints that it planned to challenge the partnership -- particularly by hiring veteran litigator Sandy Litvack to work on the probe.
Litvack was the department's antitrust chief under President Jimmy Carter and was Walt Disney Co's former vice chairman.
Shares of Google and Yahoo were little changed in extended trading after news of the modified proposal broke. Google edged up $1.51 to $348 from its $346.49 close, while Yahoo slipped 7 cents to $12.68 from its $12.75 close.
Editing by Carol Bishopric, Tim Dobbyn, Gary Hill