SAN FRANCISCO/NEW YORK (Reuters) - Yahoo Inc said on Wednesday it would test using Web search advertising from Google Inc in a move that pressures Microsoft Corp to raise its bid for the company.
Pedestrians walk past the Time Square Yahoo sign in New York April 7, 2008.
(Joshua Lott/Reuters)
Yahoo, facing a three-week deadline from Microsoft to reach a deal and eager for a higher offer, also is still in talks with Time Warner Inc's AOL about a potential tie-up, a source familiar with the discussions said.
The two-week test with Web search leader Google would involve Yahoo targeting Google Web search advertisements at 3 percent of the users of Yahoo's own search services. Brokerage Sanford C. Bernstein has estimated that by turning over all search ads to Google, Yahoo could boost revenue by 10 percent.
Microsoft fired back saying that a deal between Yahoo and Google would make the market for Web search less competitive -- turning the tables on Google, which has charged Microsoft with anti-competitive practices in the past. Microsoft itself would face tough regulatory scrutiny if it buys Yahoo.
Microsoft General Counsel Brad Smith said Yahoo and Google would consolidate more than 90 percent of the search ad market in Google's hands. Herb Kohl, the Democratic head of the U.S. Senate antitrust subcommittee, chimed in to say he was watching Yahoo's deal closely to "ensure it does not harm competition."
Investors barely reacted to what was seen as Yahoo's latest effort to force Microsoft to raise its cash-and-stock bid, now valued at billion. Yahoo shares rose 7 cents to .77, Microsoft added 14 cents to .89, and Google fell 0.8 percent to 4.19.
"This doesn't put an end to the negotiations, but it perhaps balances things out," Cowen and Co analyst Jim Friedland said. "It looked like Microsoft had all the cards. Yahoo is at least now able to use this for leverage to get Microsoft to pay more."
FREEING YAHOO
Yahoo was once Google's biggest customer, relying on it to provide search ads next to Yahoo search results until 2004, when it embarked on creating its own Web search ad system, known as Project Panama, which it only released in early 2007.
A full-scale Google deal would boost Yahoo's cash flow by reducing spending on rival technology and allow it to redirect staff and resources into its larger business selling brand advertising such as banner ads, Friedland said. Yahoo could also focus on areas where it leads such as online news, finance and sports.
"A long-term deal could be the only option that allows Yahoo to remain an independent company," a source close to Google said.
Bernstein analyst Jeffrey Lindsay said a broad paid search deal with Google could justify a per share price for Yahoo. If Microsoft objects to regulators over Google, it could lead to many months of regulatory delays, discouraging Microsoft from pressing ahead with its own takeover plans, he argued.
"Yahoo's proposed trial of search with Google is a shrewd move that could significantly complicate Microsoft's unsolicited bid for Yahoo," the Wall Street analyst concludes.
Yahoo is not opposed to an eventual deal with Microsoft at a higher price, said a source familiar with Yahoo's thinking.
But Lindsay believes the economics justifying Microsoft's bid start to weaken if it has to pay above a Yahoo share.
And even if a Google deal happened, it would do nothing to stem the decline in numbers of Web searchers using Yahoo.
Yahoo's share of the U.S. Web search market has dropped more or less steadily to 21.6 percent in February from 26.9 percent in January 2007. Similarly, Microsoft's share is down to 9.6 percent in February from 10.4 percent in January 2007.
Meanwhile, Google's U.S. share has grown to 59.2 percent in February from 52.6 percent at the start of 2007, according to Internet audience statistics from comScore Inc.
Yahoo has traditionally led in graphical display ads, a more fragmented business. Google's share of display was relatively tiny until its acquisition last month of ad technology company DoubleClick Inc put it on a better footing.
Google derived almost all its .6 billion in revenue last year from small text ads alongside Web search results on its sites and affiliated partner sites such as AOL and Ask.com.
Google, plus AOL and Ask.com, represent 70 percent of the U.S. Web search audience, according to comScore. Were Yahoo to throw its search business to its competitor, Google's share of the U.S. Web search market would top 90 percent.
Since Google is better at turning search traffic into ad dollars than Yahoo and Microsoft, its actual share of revenue in this business is underestimated by search statistics. Lindsay estimated in September that yielding search to Google could boost Yahoo earnings per share by more than 40 percent.
Yahoo faces a three-week deadline issued by Microsoft Chief Executive Steve Ballmer in a letter to Yahoo on Saturday for Yahoo to agree to its offer or risk seeing the bid lowered and Microsoft starting a proxy battle to take over the board.
(By Eric Auchard and Anupreeta Das )
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