(Agencies)
Updated: 2008-04-10 11:47

SAN FRANCISCO - Yahoo Inc. is surrendering some of its advertising space to Internet search leader Google Inc. in an unusual test that could be just the first step in a last-ditch effort to escape its unsolicited suitor, Microsoft Corp.

Yahoo also is close to unveiling a complex plan that would combine its Web site with Time Warner Inc.'s fallen Internet star, AOL. Under that plan, Yahoo also would spend billions of dollars to buy back stock to put some money in shareholders' pockets, according to a Wall Street Journal story Wednesday night that cited unnamed people familiar with the matter.

But Microsoft reportedly is mounting a counterattack if Yahoo's maneuvering forces it to raise its bid. In a surprise twist, Microsoft has contacted Rupert Murdoch's News Corp. about joining forces to buy Yahoo, according to a New York Times report, also posted online late Wednesday, that cited people involved in the discussions.

Yahoo has been working for more than two months to put together a package that trumps Microsoft's takeover bid.

It has explored aligning with New Corp.'s online hangout, MySpace.com, for example.

All the negotiations are at a sensitive stage and still could unravel, according to the newspapers' reports.

Contacted late Wednesday, a Yahoo spokesman declined to comment on the reported AOL talks. Microsoft representatives didn't respond to inquiries.

Microsoft has set an April 26 deadline for Yahoo to accept its current offer, which was initially valued at $44.6 billion (euro28.36 billion), or $31 per share. Because Microsoft wants to pay for half of the acquisition with its recently declining stock, the deal is currently valued at about $42 billion (euro27 billion), or $29.24 per share.

Under the ad deal announced Wednesday, Google will show ads tied to about 3 percent of the queries made in the United States through Yahoo's search engine - the Internet's second largest after Google's.

Yahoo will still use its own technology - acquired and developed at a cost of more than $2 billion - to place ads next to the other search results on its Web site. The Sunnyvale-based company also will continue to distribute search ads to its own partners.

Together, Google and Yahoo control more than 80 percent of the US search market, making it highly unlikely that antitrust regulators would allow the Silicon Valley rivals to form a long-term advertising alliance, analysts said.

By flirting with Google, Yahoo is trying to signal it has other options besides succumbing to Microsoft, said Standard and Poor's equity analyst Scott Kessler. But Kessler doubts most investors will take the Google alternative seriously, given the antitrust obstacles.

"It doesn't make a lot of sense for Yahoo to make an announcement like this when everyone knows a long-term relationship (with Google) can't happen," Kessler said. "It strikes me as somewhat desperate."

Yahoo's alliance with Google makes a friendly deal with Microsoft less likely and raises the odds that Microsoft will follow through on a recent threat to lower its bid, Kessler said.

Microsoft has said that if things can't be worked out amicably, it is prepared to oust Yahoo's 10-member board in a proxy contest that could prolong the drama into the summer.

If the Google tests were to begin immediately, they would be completed shortly before the April 26 deadline Microsoft has set for accepting its bid.

Yahoo didn't specify when the trial run would begin, but said the test doesn't mean it will join the thousands of other Web sites that rely on Google to place text-based advertising links next to search requests or their other content.

Google's partnerships generated $5.8 billion in ad spending last year, with nearly $5 billion of that going to the Web sites participating in the network.

Drawing upon Google's moneymaking prowess theoretically would help Yahoo bounce back from a two-year streak of declining profits that opened the door for Microsoft's takeover bid.

Yahoo maintains it is worth more than $45 billion (euro29 billion), a point that it reinforced in a letter sent to Microsoft Chief Executive Steve Ballmer early this week. Before the Microsoft bid, Yahoo's market value had sunk to roughly $27 billion (euro17.17 billion), or $19.18 per share.

In a statement Wednesday, Microsoft reiterated its bid is fair and pointed out the antitrust problems likely to prevent Google and Yahoo from working together.

Google and Yahoo together control about 81 percent of the US search market, according to the most recent data from comScore Media Metrix.

"This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo," said Brad Smith, Microsoft's general counsel. "We will assess closely all of our options."

A combination between Microsoft and Yahoo also would likely face an extensive regulatory review that could last anywhere from six months to a year, predicted Nate Eimer, a Chicago attorney specializing in antitrust law.

Microsoft and Yahoo have a combined 31 percent market share in the United States, according to comScore. But that's far behind Google's 59 percent.