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Yahoo deals with Google, maybe AOL, to fend off Microsoft

Thu, 04/10/2008 - 8:47am
Brian Santo

Yahoo is close to an agreement with Time Warner Inc. to combine its Internet operations with AOL, The Wall Street Journal reported.

At the same time, Yahoo, which is lagging Google with its ad business, said it will begin a limited test of Google’s AdSense for Search service.

The Yahoo-AOL proposal would involve Yahoo buying back some of its own stock – using Time Warner cash – at a price that is higher than the one offered by Microsoft. Microsoft is attempting to buy Yahoo at a price Yahoo insists is inadequate.

A stock buyback would automatically improve earnings per share (EPS), which has some potential for raising the value of Yahoo’s stock. Similarly, the AdSense relationship with Google addresses a specific weakness that Yahoo has, and so also has the potential for raising the value of the stock.

Should either or both of those maneuvers achieve the desired result, it would force Microsoft to either sweeten its offer or drop its bid. Either option would be acceptable to Yahoo.

Microsoft, however, is said to be doing its own maneuvering. The New York Times and WSJ both report that Microsoft is talking with News Corp. (which owns The WSJ) about combining on a joint bid for Yahoo.

News Corp. also owns MySpace. Interestingly, News Corp. was once considered among the companies that Yahoo could call on to avoid a deal with Microsoft.

AdSense delivers Google ads alongside search results from Google or from a third party – in this case, Yahoo. The test will apply only to traffic from Yahoo.com in the U.S. and will not include Yahoo’s extended network of affiliate or premium publisher partners. The test is expected to last up to two weeks and will be limited to no more than 3 percent of Yahoo search queries, the company said.

Yahoo explained that the test is a means of exploring a way to potentially add value to the company. The perceived lack of value is what put Yahoo into play, which explicitly places the experiment in the context of the company’s efforts to fend off Microsoft.

It remains to be seen how practical an ad relationship between Yahoo and Google could be. A widely held belief is that any such combination would raise antitrust concerns. On the other hand, it’s likely a Yahoo-Microsoft-News Corp. combination would also raise antitrust concerns.

More Broadband Direct:

• N.Y. Post: TWC offering TV Caller ID to NYC-area subs 

• Verizon takes umbrage at TWC ads 

• SCTE announces board election results for 2008 

• Arris 1 GHz multiplexer buys fiber bandwidth 

• JDSU to demo new digital video test solution at NAB 

• Yahoo deals with Google, maybe AOL, to fend off Microsoft 

• Scopus incorporates Ambarella processors into UE-9000 series 

• Broadband Briefs for 4/10/08

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