The European Union has announced that it has been investigating the terms of Google’s proposed deal to partner with Yahoo for advertising.

The deal would see Google’s advertising programmes built into Yahoo’s search engine in the US and Canada.

However, the EU Competition Commission argues that there are anti-trust implications because the two companies do business in Europe.

The EU’s present inquiry could escalate to a formal investigation.

The announcement follows on the heels of news of a similar anti-trust investigation by the US Department of Justice.

If it goes ahead, the partnership would control more than 80% of the online advertising market.

EU antitrust regulations have traditionally proven more strict than American ones, so the investigation could prove to be a significant stumbling block for the deal.

The World Association of Newspapers, which represents some 18,000 titles worldwide, joined the fray in opposing the deal on Monday.

“The reality is that a large portion of the traffic to most online newspapers’ websites today comes through paid search or natural results on search engines,” the group said in a statement.

“For this reason, competition among search engines is absolutely vital for newspapers – to ensure that no search engine can set monopoly prices for paid search ads, and to prevent any search engine from influencing users’ surfing habits by manipulating unpaid search results.”

Each advert will generate revenue for Google. However, there is considerable speculation that another motivation is to provide Yahoo with an alternative to Microsoft’s bid for a hostile takeover.

Both Yahoo and Google say that they are cooperating with investigators on both sides of the Atlantic, but argue that they will go ahead with the deal in October.

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Internet company Yahoo has reported worse-than-expected results for a three-month period in which it fought off a takeover approach from Microsoft.

Net income fell 18.6% to $131m (£65.8m) in the three months to the end of June.

Microsoft offered $31 a share for Yahoo in February but Yahoo has said it will only consider an offer of $33 a share.

The results came the day after Yahoo reached an agreement with Carl Icahn to stop him trying to replace its entire board at next month’s annual meeting.

Mr Icahn and two of his appointees have been given seats on an enlarged Yahoo board in return for agreeing to withdraw his slate from election at the 1 August annual meeting.

Mr Icahn, who owns about 5% of Yahoo, felt that the search engine company should have accepted Microsoft’s $31 a share offer – its shares closed on Tuesday at $21.58.

Another set of disappointing figures will increase pressure on Yahoo to reach a deal.

“The results, I would say, were relatively mediocre,” said Ryan Jacob, a portfolio manager from Jacob Internet Fund.

“Given concerns about a slowdown in the display ad market, expectations were very low.”

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Yahoo has reached an agreement with the activist investor Carl Icahn that will stop him trying to replace its board.

Mr Icahn was annoyed that Yahoo had resisted Microsoft’s attempts to take it over.

He planned to replace the board at next month’s annual meeting and then sell the company to Microsoft.

Yahoo’s board will now be expanded from nine members to 11, comprising Mr Icahn and two of his nominees along with eight of the original members.

Mr Icahn, who owns 5% of Yahoo’s shares, said that he would now withdraw his other nominees from the firm’s annual meeting on 1 August

In a statement, he said that the sale of the company still merited “full consideration”.

Last week, Yahoo angrily rejected a joint takeover offer for the company from Microsoft and Mr Icahn, describing the alliance as “odd and opportunistic”.

Microsoft offered $31 a share for Yahoo in February but Yahoo has said it will only consider an offer of at least $33 a share.

On Friday Yahoo’s shares closed at $22.45.

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Yahoo has angrily rejected a joint takeover offer from Microsoft and the investor Carl Icahn.

Microsoft would have bought Yahoo’s search engine while Mr Icahn would have ended up with the rest of the business.

Yahoo objected to being given only 24 hours to consider the offer and there being no opportunity to negotiate the terms of the deal.

“It is ludicrous to think that our board would accept such a proposal,”

Yahoo said in a statement.

“This odd and opportunistic alliance of Microsoft and Carl Icahn has anything but the interests of Yahoo!’s stockholders in mind,” Roy Bostock, chairman of Yahoo, said.

Still for sale

The proposal involved the immediate removal of the Yahoo board as well as its top management.

The statement from Yahoo repeated the offer to sell the entire company to Microsoft for at least $33 (£16.5) a share and suggested that a takeover of the entire company would be much simpler than the proposed restructuring.

Microsoft offered $31 a share for Yahoo in February. On Friday the shares closed at $23.16.

The latest offer comes weeks before Yahoo’s 1 August annual meeting, when Mr Icahn will be trying to replace its board with his own slate of directors.

Mr Icahn owns about 5% of Yahoo.

Microsoft has said it is no longer interested in negotiating with the current directors, but will enter talks if a new board is in place in August.

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Internet giant Yahoo has defended its decision not to sell part of the company to Microsoft, saying “it made no sense financially or strategically”.

Microsoft proposed buying its online search business after withdrawing an offer to buy Yahoo outright.

Yahoo is facing an attempt by billionaire investor Carl Icahn to unseat the board after it failed to do a deal with Microsoft.

It has called for shareholders’ support at its annual meeting on 1 August.

“Microsoft’s ‘hybrid’ proposal to acquire only Yahoo’s valuable search business makes no sense for the company either financially or strategically,” Yahoo said in a presentation to shareholders released ahead of the meeting.

Instead of doing a deal with Microsoft, Yahoo signed an agreement with Google to use its online advertising technology.

Yahoo defended that decision, saying it expects that deal to generate $250m-$450m (£125-£225m) from that deal within the first 12 months.

It criticised Mr Icahn’s “ill-defined plan” for Yahoo, which it said focused on selling the firm to Microsoft “even though Microsoft has repeatedly confirmed that it is not interested in a full acquisition”.

Shareholder Mr Icahn is trying to oust Yahoo’s board, including the Internet firm’s co-founder and chief executive Jerry Yang.

Yahoo shares fell 1.7% to $20.97 (£10.54).

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Shares in Yahoo fell up to 7.5% on Friday, after some investors doubted the financial benefits of a tie-up with search engine giant Google.

Yahoo said the agreement to allow Google ads to appear alongside Yahoo search results could be worth up to $800m (£410m) in additional revenue.

Some analysts suggest a deal with Microsoft may have been better for Yahoo shareholders.

Yahoo shares later recovered to finish broadly flat, while Google shares rose.

This week Yahoo spurned a Microsoft offer for its online search business.

The internet giant said it did not want to sell just that part of the business and had hoped to persuade Microsoft to revive its $47.5bn offer for the whole of the company, that Yahoo had earlier rejected.

Microsoft said in a statement on Thursday that it was no longer interested in buying Yahoo outright.

Instead, according to the Reuters news agency, it offered $1bn in cash to take control of the search business and a further $8bn for a 16% stake in Yahoo.

Citing sources familiar with the deal, Reuters suggested the Microsoft deal would have delivered $1bn in additional revenue for Yahoo every year from improved advertising rates.

Analysts suggest that Yahoo may face further legal action from shareholders unhappy at their handling of the Microsoft negotiations.

“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,” said Jeffrey Lindsay, an analyst at Sanford C Bernstein.

‘Review’

Yahoo’s shares recovered towards the end of trading on Friday to close down five cents at $23.47.

Google shares however rose 3.4% to close at $571.51.

The agreement between Google and Yahoo will see Yahoo use the search engine giant’s advertising technology.

It is expected to further bolster Google’s position as the market leader, but the additional revenue will also be important for Yahoo.

“Microsoft walking from Yahoo should allow Google to continue to extend its lead in online advertising in the near-term,” said RBS Capital Markets’ analyst Ross Sandler.

“[And] at the same time, fortify Yahoo’s position as the clear number two player,” he said.

Google said it believes that the deal does not need regulatory approval, but that it would delay its start by up to three and a half months to give the US Department of Justice a chance to review it.

The Chairman of the Senate subcommittee on anti-trust, competition policy and consumer rights said it would be looking at the agreement.

“The consequences for advertisers and consumers could be far-reaching and warrant careful review, and we plan to investigate the competitive and privacy implications of this deal further,” said Senator Herb Kohl.

News reported by BBC