Google rubbed more sand in Yang’s eyes Wednesday when it walked away from a plan announced in June to sell advertisements on Yahoo’s pages after the Justice Department threatened to block the deal on antitrust grounds.

Google already has more than 70% of the search-engine driven advertising market. Yahoo has about 10%, according to BusinessWeek.

For Yang, it was a chance to revive falling sales, even if it meant falling on his sword instead of wielding it against its chief rival.

Now, his shareholders are livid. His future is uncertain. And his best option for survival is a partnership with Microsoft Corp. (MSFT) – the company whose generous takeover offer he rebuffed earlier this year.

The dropped advertising deal between Yahoo and Google revealed a major growth problem for each company.

For Google, it shows that the search engine juggernaut has grown so large that it now has far fewer legal avenues of expansion open to it.

For Yahoo, it shows that Yang is running out answers for Google’s market dominance.

Yahoo’s Troubles

Yahoo has had little to cheer about in the past year.

Its sales growth fell to 3% in the third quarter, down from 14% over the same period last year. Profit has dropped in 10 of the last 11 quarters, Bloomberg reported.

Last month, it announced 1,500 job cuts. And, Scott Moore, the senior vice president in charge of the company’s media group, recently announced he, too, is leaving.

In addition to Moore, Yahoo shed five top executives this past summer: Jeff Weiner (executive V.P. of the network division), Brad Garlinghouse (who oversees e-mail and instant messaging), Vish Makhijani (general manager of web search), Qi Lu (top engineer for search marketing) and Joshua Schachter (founder of social bookmarking site, delicious).

In the past year, the company’s stock value has more than halved – from just under $30 per share to under $15 a share, including hitting a 52-week low of $11.25 last week.

During that time, Yang sternly rejected several takeover offers from Microsoft, including a $47.5 billion bid that amounted to $33 a share. The offer at the time valued Yahoo’s share at a 62% premium.

This led to a proxy battle instigated by board member Carl Icahn, who wanted to oust Yahoo’s current board of directors and replace it with candidates of his choosing. Icahn – it should be noted – favored a Yahoo partnership with Microsoft over Google.

“I don’t regret any minute of what happened, even though it wasn’t the most fun thing to go through,” Yang said Wednesday at a press conference, Bloomberg reported.

What’s Next for Yahoo?

With or without the deal, Google’s market dominance will grow. Nothing has slowed it down thus far, and competition such as Yahoo, Microsoft, Time Warner Inc.’s (TWL) AOL, and IAC/InterActiveCorp.’s (IACI) Ask.com aren’t gaining any ground.

Yahoo’s only fighting chance is to team up with one or several of them

Yang’s only real chance may be going back to deal with Microsoft.

“To this day, I’d say the best thing for Microsoft to do is buy Yahoo,” Yang said during an appearance at the Web 2.0 conference in San Francisco, Dow Jones reported. “We’re willing to sell the company.”

Of course, there’s no guarantee Microsoft is still interested.  At the very least, the company could still be jaded from repeated rebuttals in the past year. And the fact that Yahoo also is in talks with AOL won’t help.

JPMorgan Chase & Co. (JPM) analyst Imran Khan wrote in a research note that a good solution would be fir Yahoo to sell its search operations to Microsoft, a deal Microsoft previous proposed and Yahoo rejected.

Striking that kind of a deal would save Yahoo an estimated $1.4 billion and allow it to focus on its aesthetics, such as ad displays, Khan said.

“We think continued investment in search, at the expense of display investment, has given competitors the opportunity to bite into Yahoo’s leading display ad market share,” Khan wrote.

But Yahoo’s board – many of them already feeling slighted by Yang – may consider another move: Have Yang walk to plank.

Since Yang climbed back aboard as Yahoo’s CEO in June 2007, the company’s sales, market share, and market value have all decreased.  That doesn’t bode well for a CEO who could have avoided another horrendous quarter and shareholder insurrection simply by agreeing to Microsoft’s $47.5 billion bid earlier this year.

Source: Yahoo! Searching for Answers After Google Walks Away from Ad Deal