Yahoo in Talks With Google
To
Handle Some Search Ads
Yahoo Inc. is close to
announcing that it plans to carry search advertising from Google Inc. as part of a
test that could lead to a broader partnership, according to people familiar with
the matter.
The short-term test, involving a very limited percentage of
Yahoo's Web search queries, is designed for the two sides to evaluate the
revenue potential of a broader search ad outsourcing arrangement. They have been
discussing such an arrangement as part of Yahoo's pursuit of alternatives to Microsoft Corp.'s
unsolicited acquisition offer, according to people familiar with the matter.
The test under discussion, given its short time frame and limited
scope, shouldn't stand in the way of any eventual sale of Yahoo to Microsoft,
says the person familiar with the matter. But it could factor into the dynamics
of the ongoing deal standoff, as a way for Yahoo to signal to investors its
alternatives to the Microsoft deal and potentially as an irritant for Microsoft,
which views Google as a major rival.
Analysts have predicted outsourcing its search ads to Google
would boost Yahoo's cash flow, since Google's system generates significantly
more revenue for each search query than Yahoo does. Under such an arrangement,
Yahoo would likely garner a majority of the revenue and Google keep the rest as
a commission.
But antitrust experts say any broader ad pact between the two
would likely face intense regulatory scrutiny, given Google's and Yahoo's
significant shares of the Web-search and online-advertising markets.
Microsoft Chief Executive Steve Ballmer in a letter Saturday gave
Yahoo directors a three-week ultimatum before Microsoft would go hostile,
implying that Microsoft would lower its bid in that case. Yahoo's directors have
rejected Microsoft's offer as too low, and in a letter responding to Mr. Ballmer
Monday called his ultimatum "counterproductive." Some major Yahoo shareholders,
including Legg Mason Inc. portfolio manager Bill Miller, have subsequently said
they likely wouldn't support Microsoft in any hostile contest were it to lower
its bid.
Prior to Microsoft's offer for Yahoo, Yahoo already had been in
negotiations to outsource its Web-search advertising in Europe to Google, say
people familiar with the matter. Since last year, some investors have called for
Yahoo to abandon its own search advertising system as a quick way to boost its
revenue.
Citigroup Global Markets analyst Mark Mahaney in a February
research note had estimated that Yahoo could boost its cash flow more than 25%
annually by outsourcing all its search advertising to Google. Yahoo executives
had considered such a maneuver as part of a strategic review last year,
according to people familiar with the matter, but Mr. Yang in October signaled
that it had decided against it.
"We believe having a principal position in both search and
display advertising is critical to creating...long-term shareholder value," Mr.
Yang told analysts during Yahoo's earnings conference call in October.
Yahoo's search for alternatives to a Microsoft purchase and poor
performance, including a sinking share price prior to Microsoft's bid and a 2008
revenue outlook considered tepid by many investors, possibly spurred the change
of heart toward Google.
