Can’t say you didn’t see this coming. Merger mag The Deal reported Tuesday that Google and Yahoo will likely abandon their efforts to partner on online advertising. According to the story, regulators met with the two companies on October 17, and the tone was described as “grim.”

The DOJ is expected to challenge the partnership, although it had appeared for a time like progress was being made towards agreement on some core concessions. That now appears to not be the case.

Antitrust lawyers told the magazine that the government’s case may not be a slam dunk, however with uncertain times ahead with the economy and all, taking up a costly court case may not be in Google and (especially) Yahoo’s best interest.

Of the two, Yahoo needs this deal the most. In the wake of the Microsoft merger disaster, the company desperately is in need of good news. It’s quarterly financials — to come later today after the closing bell — are expected to be weak, and its laying off 1,500 workers, if not more.

With its own web advertising business apparently struggling, the Google deal would have given it a crutch to lean on. While the entire web advertising industry is going to take a significant hit, Google will likely be able to weather the storm easiest through its market strength.

Who wins here? Microsoft. Not only will the lack of a deal keep its hopes of becoming a serious competitor in the web advertising space alive, but it will likely make Yahoo a cheap acquisition target in the not-so-distant future.

Yahoo shareholders can’t be happy with that proposition.

 
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