Internet, media stars line up for Yahoo

By MICHAEL LIEDTKE, AP Business Writer1 hour, 7 minutes ago

Yahoo Inc.'s last-ditch efforts to avoid a takeover by Microsoft Corp. appear

to be setting the stage for a dramatic finale featuring a rich cast of Internet

and media stars.

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 MySpace.com.

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

MSN.com.

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 MySpace.com.

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."

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