Google tries to initiate counter-bids for Yahoo to scupper Microsoft deal

Yahoo is examining a broad alliance with its internet nemesis Google, as a last-ditch attempt to avoid being swallowed up by Microsoft.

Google contacted Yahoo within hours of Microsoft's hostile $45bn (£23bn) bid approach last Friday, and was yesterday stepping up an attempt to scupper a combination of its two closest competitors in the online advertising market.

As well as planning to complain to competition regulators, Google was also reaching out to other media companies in an attempt to encourage them to make a counter-bid for Yahoo. However, Google's aggressive moves risked backfiring, as competition experts warned it could be seen as trying to throttle at birth a potentially powerful new rival.

Sources said it was offering Yahoo and its potential new owners a deal to take over the sale of advertising on its search engine. Such an outsourcing deal could come with guaranteed minimum payments from Google running into hundreds of millions of dollars. Those guarantees would immediately inflate the profits of Yahoo as a standalone company, and potentially tempt its long-suffering shareholders to agree to maintain its independence. It could also reduce the risks of a bid for another media company.

Yahoo is believed to have examined a similar outsourcing deal last year, covering only its European operations, but decided to keep the business in-house.

Rupert Murdoch's NewsCorp, which owns the MySpace social networking website, and Time Warner, the owner of AOL, were among those being touted as potential counter-bidders yesterday, but none is believed to be particularly tempted, given that Microsoft has offered to pay a 62 per cent premium to Yahoo's previous market value. Mr Murdoch said last night: "We are definitely not going to make a bid for Yahoo"

Although Yahoo's shares rose another 3.3 per cent yesterday, they remain below the $31 level at which Microsoft pitched its bid.

Steve Ballmer, Microsoft chief executive, called the offer "generous", and escalated a war of words with Google on the issue of competition. "Google's clearly got a dominant position. They've got about 75 percent of paid search worldwide," he told analysts at a meeting on Wall Street. "We think this enhances competition. Anything else would be less good from that perspective, and that will be the message we will communicate to regulators."

Over the weekend, in a blog post on its website, Google's chief legal officer Michael Drummond said Microsoft's acquisition of Yahoo would be bad for the internet. "Could Microsoft now attempt to exert the same sort of inappropriate and illegal influence over the internet that it did with the PC?" he asked.

A Google challenge to the Microsoft takeover would centre on the subsequent concentration of email and instant messaging services, Mr Drummond indicated.

It would be the latest in a string of legal tussles between Google and Microsoft, who are increasingly competing on the same territory. Google had success last year in complaining that Windows Vista, Microsoft's new operating system for PCs, guided users to its MSN search engine more easily than it did to Google, but analysts warned that regulators are more likely to be concerned about a Yahoo-Google alliance than they would be by Microsoft's acquisition of Yahoo.

Laura Martin, analyst at Soleil-Media Metrics, said there was an element of tit for tat in the legal challenges. "We foresee more regulatory risk offshore, but in the US we expect Google to protest the acquisition because Microsoft raised issues about Google's acquisition of DoubleClick and a combined Microsoft-Yahoo is a formidable competitor to Google," she said. "It may be difficult for regulators to argue anti-competitive impact because Microsoft plus Yahoo represents only a 30 per cent share of the search market, against more than 60 per cent for Google."

Yahoo will this week follow up on what insiders said was a string of preliminary expressions of interest over the weekend. "Microsoft's proposal is one of many options that we're evaluating in order to maximise value for our shareholders and employees over the long term," Jerry Yang, Yahoo's founder and chief executive, told employees in an email.