BURLINGAME, CALIF. -
Will it be
The news marks a surprising twist in the 2-month-old acquisition saga. What's clear:
On Wednesday afternoon, Yahoo! issued a terse announcement that it was launching a two-week "trial advertising" partnership with
That news was followed by reports that Yahoo! may also be close to striking an arrangement that would combine the search engine company with AOL, the struggling Internet division of
Industry pundits believe Yahoo!'s latest moves will help preserve--and even increase--its perceived share value in the face of bluster from
In after-hours trading, shares in Yahoo! and Microsoft moved a few pennies: Yahoo! edged down by 3 cents to $27.77; Microsoft fell 18 cents to $28.71. Google rose $1.81 to $464.19.
Since Microsoft made its bid, Yahoo! executives have been considering a dizzying array of relationships with a slew of potential alternative partners to avoid a takeover:
Ballmer hasn't been twiddling his thumbs, either. He has reached out to News Corp., according to industry sources familiar with the companies.
Although Yahoo! has staunchly asserted it is worth more than the $31 a share cash-and-stock offer made by Microsoft, Ballmer has been reluctant to sweeten the deal. Paying more than $40 billion for Yahoo! would already send Microsoft to the credit markets to borrow money. Crafting a deal with News Corp. could lighten that financial burden as well as add the nice touch of a vibrant social-networking site, namely MySpace.
In February, Murdoch asserted he wasn't interested in acquiring Yahoo! But he didn't rule out partnering with Microsoft.
Spokespeople for the companies declined to comment.
None of this was quite what Ballmer expected would unfold when Microsoft launched its bid for Yahoo! on Feb. 1. Ballmer had hoped to quickly lock down a deal with a company that seemed adrift. However, he didn't seem to factor in the fierce antagonism that Microsoft still sparks in Silicon Valley, particularly among industry veterans including Yang and Google's chief executive, Eric Schmidt.
Microsoft executives consulted with former
But Yahoo! executives had little interest in taking part in any kind of pre-merger discussions with Microsoft. Instead, they launched wide-ranging conversations with possible white knights who could keep the company out of Microsoft's grasp. Yahoo! also adopted measures aimed at making a hostile takeover expensive, including promising executives two years' severance if they left Yahoo! "with good reason" within two years following an acquisition.
Microsoft and Yahoo! managers have met at least twice since February. Ballmer has described the talks as "limited" and "not substantial." Yahoo!'s Jerry Yang and Chairman Roy Bostock, in a retort Monday, said the conversations were "constructive" on topics "including integration and regulatory issues." (See: "Yahoo! To Microsoft: Go Away") But maybe Yahoo! executives were simply listening for clues about how to skirt antitrust hurdles if they chose to work with Google instead of the Redmond software giant.
The trial advertising relationship announced Wednesday signaled that Yahoo and Google could be close to finalizing such a relationship.
Here's how it is likely to work: Over the next two weeks, Web surfers based in the U.S. who plug a search term into Yahoo!'s search engine will, as they always do, see a series of ads running alongside those search results. The overwhelming majority of those ads will still be served up by Yahoo!'s in-house system. But "no more than 3%" of the advertisements will be generated by Google's AdSense for Search service.
What the two companies will learn from the test is how to set a value for either an allowance that Google might promise to Yahoo! or how to structure a revenue-sharing deal.
In either case, the test will involve swapping far more information about sensitive advertising mechanics and revenues than Yahoo! has been willing to share with Microsoft.
As recently as October, Yahoo!'s Yang was reluctant to even consider turning over Yahoo!'s ad systems to Google. In a conference call last October with analysts, Yang said: "We believe having a principal position in both search and display advertising is critical to creating ... long-term shareholder value." Last year, Yahoo! generated 87% of its total revenues from "marketing services," the combination of so-called "banner" advertisements as well as search advertising
In its annual report, Yahoo! lists Google as first among its competitors: "Google’s Internet search service directly competes with us for Affiliate and advertiser arrangements, both of which are key to our business and operating results." The report also lists Microsoft and AOL, as well as other publishers, as competitors.
Antitrust experts on Wednesday were quick to note that there are no regulatory problems with the carefully limited test outlined by Yahoo! and Google. "If Google controls Yahoo in some way, it would lessen competition in the market and that's what the laws are concerned about," notes Lande, professor of anti-trust law at University of Baltimore Law School. "But of course, that's not what they've announced."
If Yahoo! chose to let Google handle a bigger chunk of advertisements, regulators might take a closer look. "A search engine is searching and advertising, and if you merge advertising, that's very much like a merger," Lande suggests. "A joint venture is evaluated under the same anti-trust laws as a merger."
"Should there be moves to make this agreement permanent, we will examine it closely in the Antitrust Subcommittee to ensure that it does not harm competition," said U.S. Senator Herb Kohl (D-WI), chairman of the Senate Judiciary Committee's Subcommittee on Antitrust, Competition Policy and Consumer Rights in a statement. "Following closely on the heels of Google's acquisition of DoubleClick, this Google-Yahoo alliance would represent even further consolidation in the internet advertising market," Kohl said.
Large Yahoo! shareholders are clearly weighing the price of the deal and how much it would help or hurt mixed portfolios that include both Microsoft and Yahoo! holdings. (See: "Ballmer's Secret Weapon")
David Hilal, associate director of research at Friedman, Billings, Ramsey & Co., told Forbes.com that he was betting that Microsoft might still be tempted to raise its bid. That move could appease a few Yahoo! executives and some big institutional investors.
Wendy Tananka and Andy Greenberg contributed to this report.
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