Yahoo!, the internet search engine giant, has already endured a terrible year so far.

However, last night's announcement of falling profits and the decision to cut 10 per cent of its workforce, will heighten the pressure on its beleaguered chief executive, Jerry Yang, who saw fit to turn down a $47.5 billion takeover bid from Microsoft this year.

Since rejecting the deal, with the argument that Microsoft's offer did not represent Yahoo!’s true value, the company's stock has plunged below Microsoft's original $31-a-share offer, and it has lost market share to its rival Google.

During that time, Mr Yang has also been battling against the might of Carl Icahn, the US activist investor and scourge of underperforming companies. Although Mr Yang and Mr Icahn recently reached a truce, it cost Yahoo! seats on the board of directors and, therefore, considerable clout.

While job cuts and falling profits should normally cause panic, Yahoo!'s 1,500 redundancies was seen as good news by investors, and shares jumped around 8 per cent.

Though analysts conceded that it would take more than cutting jobs to turn around the company.

Yahoo!’s problem is that its profits are wedded to the online advertising market, which has been dragged down by falling consumer spending and tighter credit conditions.

Yahoo! shows a combination of graphical “display” adverts, used to promote an advertiser’s brand, and ads that appear alongside a user's search results. This model has suffered in comparison to Google’s, which relies on search ads for profits and where advertisers only pay when someone actually clicks on the ads.

As advertisers can see more clearly how these search adverts are tied to their profits, it is easier to justify spending and so Google search ads are less vulnerable to the slumping economy.

So what's next for Yahoo!? A deal with Microsoft is not quite dead. Microsoft's chief executive, Steve Ballmer, recently hinted that the company is still interested in Yahoo!, but it is clear there are no current talks.

Yahoo! and Google are still discussing a deal, where Yahoo! would show some Google's search ads, which they say could bring in $800 million in new revenue. However, the deal has been met with strong resistance with anti-trust regulators in the US.

Mr Yang said that yesterday’s cost cutting measures would allow for future acquisitions, fuelling speculation about a merger with AOL, which parent company Time Warner has been trying to offload for months.

It was reported today that the deal would involve Yahoo! taking over AOL for around $10 billion, with Time Warner taking a minority stake in Yahoo!. Insiders argued that Yahoo! might then be able to go back to the negotiating table with Microsoft from a position of greater strength.

However, analysts were sceptical at such a move. “You can’t make a successful company by merging two unsuccessful companies,” said Richard Holway, chairman of the Tech Market View, the technology analysts. “We should remember when Google and Microsoft went out to grow through acquisitions, they tended to buy companies strategic to them and doing quite well - companies like YouTube. Those are the acquisitions that work well. AOL is a declining base.”

Mr Holway suggested that the real problem for Yahoo! was that it has lost the search war to Google already, and that it failed to grab hold of a good deal with Microsoft when it was offered to them.

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