The second reason Yahoo's stock (YHOO) has rocketed higher in the past few days (the first being Hail Mary dreams of a Microsoft (MSFT) deal) is that investors are expecting a whopper of a Google (GOOG) search outsourcing partnership to be announced any day now. Specifically, the number everyone has latched onto, originally floated by Citi's Mark Mahaney, is incremental cash flow of ONE BILLION DOLLARS.

Keep dreaming.

At best, a Yahoo-Google search partnership will deliver a few hundred million to Yahoo's EBITDA. This would be a nice boost, but not the WOWZA!!! blow-out that the market is now expecting.

How do we know? Because that Mahaney $1 billion incremental cash flow estimate is based on the premise that Yahoo will:

1. Outsource 100% of its search business to Google
2. Fire everyone associated with its internal search business, thus savings hundreds of millions in costs.

In fact, Yahoo has stated clearly in recent days that it has no intention of getting out of the principal search business (see Sue Decker's interview on TechTicker), which means that it won't be firing everyone associated with Panama (or even anyone). Second, Yahoo and Google sources have also made clear that they are considering only a partial outsourcing deal, in which Google monetizes only a fraction of Yahoo's search queries. Thus, the revenue boost will likely be far less than most people expect.

Mark Mahaney's most recent note provides a range of Google-Yahoo partnership estimates. These range from $250 million at 25% outsourcing and $1.2 billion at 100% outsourcing. Importantly, however, we do not believe that these estimates take into account the fact that Yahoo intends to preserve its Panama spending. Put differently, we think that, to hit these numbers, Mark is assuming that Yahoo will still fire everyone associated with Panama (Mark--please correct us if we're wrong).

Even if Mark's estimates are just based on revenue, we would be surprised if Yahoo exceeded the $500 million in gains he is projecting on a 50% outsourcing case.

Also, don't forget that these gains are essentially one time--Yahoo won't grow search cash flow by an additional $500 million in 2009. And, more importantly, the partnership won't help stem Yahoo's continued share losses in search queries, which will make the Yahoo partnership less and less meaningful over time.

Bottom line: A partial Google outsourcing deal would be a smart move that would improve the company's near-term financial performance, but it won't be the bombshell game-changer the Street is looking for.

See Also: Chances of a Microsoft-Yahoo Deal Smaller Than You Think