Continuing to develop Panama will be key to Yahoo’s future, Sterling said. “If they get lazy about it and start to turn over more and more to Google because they have the inventory and neglect their own platform, that could over time erode the position of Panama,” Sterling said. “So they have to be vigilant about that.”

As part of the deal, the companies also plan to make their instant-messaging services interoperate, Decker said.

Yahoo and Google had been in talks over a potential deal for months. It was seen as a way for Yahoo to strengthen its advertising business and alleviate the pressure to be acquired by Microsoft. Microsoft had cited any deal with Google as a potential deal-breaker in its talks with Yahoo. It had also called it a bad business decision that would only serve to strengthen Google, the online ad market leader.

Yahoo and Google said they don't require regulatory approval for the deal, but that they would delay its implementation for three-and-a-half months while the U.S. Department of Justice reviews the arrangement. Various groups ranging from farmers to Microsoft have expressed concern about such a deal.

The deal doesn't mark the end of the turmoil around Yahoo. Its board faces a proposal by billionaire investor Carl Icahn, who hopes to replace the entire board and force the company into a deal with Microsoft.

However, the announcement probably spells the end of Icahn's plan, according to Sterling. Shareholders would only be inclined to vote for Icahn’s proposed board if they think it would help force a sale to Microsoft, Sterling noted. But Microsoft has said that it isn’t interested in buying all of Yahoo, only its search business. That kind of deal would leave the remaining Yahoo in a much worse position than it is now, he said.