Yahoo and Time Warner's AOL are closing in on a deal to combine their Internet operations, a move that could thwart Microsoft's effort to acquire Yahoo, the Wall Street Journal reports.
The possible Yahoo-AOL tie-up is part of a threefold plan by Yahoo to present shareholders with an alternative to Microsoft's unsolicited offer. Yahoo will also propose repurchasing billions of dollars of its own shares and is negotiating with Google about an advertising tie-up the Journal said.
On Wednesday, Yahoo announced a short-term test under which it will carry search advertising from Google. (Video: Yahoo agrees to test Google's Adsense)
Meanwhile, a U.S. senator who heads an antitrust subcommittee said on Wednesday that he was watching Yahoo's test tie-up with Google "to ensure that it does not harm competition."
Investors barely reacted to what was seen as Yahoo's latest effort to force Microsoft to raise its $42 billion bid.
Shares of Yahoo closed marginally higher Wednesday, and Microsoft rose 0.49 percent. Google shares lost 0.77 percent. All four companies trade on the Nasdaq.
"Yahoo has made a really clever move here. It looked like Microsoft had all the cards, Yahoo is at least now able to use this for leverage to get Microsoft to pay more," Cowen and Co analyst Jim Friedland said.
A deal with Google would boost Yahoo's cash flow by reducing spending on rival technology and allowing it to redirect staff and resources into its larger business selling corporate brand advertising such as banner ads, he said.
But even if Yahoo did turn over Web search advertising entirely to Google, a long-term deal would still do nothing to stem the decline in numbers of Web searchers using its site.
Yahoo faces a three-week deadline issued by Microsoft Chief Executive Steve Ballmer in a letter to Yahoo on Saturday for Yahoo to agree to its offer or risk seeing the bid lowered and Microsoft starting a proxy battle to take over the board.
In the test, Yahoo will deliver Google ads alongside Yahoo's search results and Google's search queries will be limited to no more than 3 percent of queries, Yahoo said.
The test will last up to two weeks.
A Google spokeswoman confirmed the test plans.
Antitrust Panel Takes Note
U.S. Sen. Herb Kohl, a Wisconsin Democrat who heads the antitrust subcommittee, released a statement saying, "We will be following closely the results of the short-term test alliance between Yahoo and Google."
"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," Kohl said.
Google and Microsoft are bitter rivals. Microsoft staunchly opposed Google's offer to buy advertising company DoubleClick for $3.1 billion last year. U.S. antitrust regulators approved the deal in December.
"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," said Kohl. "We must ensure that this consolidation does not foreclose needed competition or harm consumers."
Google's share of the Web search market among the top five providers has grown to 59.2 percent in February from 52.6 percent at the start of 2007, according to Internet audience statistics from comScore Inc.