Media giants slug it out over Yahoo

SAN FRANCISCO (AP) - April 10, 2008 Eager to frustrate Microsoft in any way possible, Internet search leader Google Inc. has already agreed to help out Yahoo by participating in an unusual test that will gauge how much more advertising Google can sell for its struggling rival.

The two-week experiment announced Wednesday will be limited to ads posted alongside a small percentage of Yahoo's online search results in the United States.

Yahoo reportedly hopes to build upon the Google deal by combining its online operations with Time Warner Inc.'s AOL, which has been struggling to regain its stride after stumbling badly for years. Google already handles AOL's search advertising and owns a 5 percent stake in the Time Warner subsidiary.

As part of the AOL deal, Time Warner would make a cash investment in return for a 20 percent stake in the combined entity, according to a Wall Street Journal story that cited unnamed people familiar with the matter. Yahoo then would use the Time Warner cash to buy back stock to put some money in shareholders' pockets. Yahoo would pay between $30 and $40 per share for an unspecified amount of stock, the Journal said.

Microsoft's bid was worth about $42 billion, or $29.24 per share, as of Wednesday, when Yahoo shares closed at $27.77.

If Yahoo's maneuvering raises the pressure for a higher bid, Microsoft reportedly may mount its counterattack with a surprising ally - Rupert Murdoch's News Corp., whose media empire already includes the Fox television networks, The Wall Street Journal and the popular online hangout

If Microsoft and News Corp. were successful in a joint bid, it would unite three of the Internet's most popular Web sites - Yahoo, along with MySpace and

The New York Times reported Microsoft's discussions with News Corp. late Wednesday, citing people involved in the discussions. Yahoo had previously been exploring using an alliance with MySpace as one of its escapes from Microsoft.

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.

The complex web of deals faces various complications.

Because Google and Yahoo control a combined 80 percent of the U.S. search market, any long-term advertising alliance between them almost certainly would have trouble getting antitrust clearance, analysts said.

A broader relationship between Yahoo and Google also would face intense political scrutiny, said Sen. Herb Kohl, D-Wis., who chairs a committee overseeing antitrust issues.

A Yahoo-AOL combination probably would have to overcome shareholder skepticism because both companies have been fading in recent years. Before Microsoft announced its bid Jan. 31, Yahoo's market value had plunged by nearly $30 billion during a two-year period. AOL is now believed to be worth about $10 billion, about half of its value when Google paid for a $1 billion stake in 2005.

And Microsoft might alienate one of partners, Facebook Inc., if it teams up with News Corp. in an attempt to buy Yahoo. Microsoft last year paid $240 million for a 1.6 percent stake in Facebook, which is the second largest online network behind News Corp.'s

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

Microsoft has set an April 26 deadline for Yahoo to accept its current offer, which was initially valued at $44.6 billion, or $31 per share. The deal's value has eroded because Microsoft wants to pay for half of the acquisition with its recently declining stock. Analysts have said that Microsoft can afford to pay about $35 per share, or about $50 billion, for Yahoo without undermining its future earnings. Yahoo has indicated it thinks its franchise is worth at least $40 per share, or more than $55 billion.

Yahoo's ad tests with Google make a friendly deal with Microsoft less likely and raises the odds that Microsoft will follow through on a recent threat to lower its bid, said Standard and Poor's equity analyst Scott Kessler.

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.

"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."

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 Microsoft's April 26 deadline. 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.

Under the 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.

By flirting with Google, Yahoo is trying to prove it has other options besides succumbing to Microsoft, Kessler said. But he 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."

Copyright © 2021 KFSN-TV. All Rights Reserved.