Yahoo to test Google advertising deal

Yahoo suggested that it is considering outsourcing the advertising on its search engine to the market leader Google, resurrecting an idea that it hopes might help it fight off the unwanted take-over from Microsoft.

News that Yahoo has launched a short-term pilot of the outsourcing scheme immediately attracted the attention of competition watchdogs, however, and Microsoft condemned the deal as handing monopoly power over search-based advertising to Google.

"Yahoo will be testing Google's AdSense for Search service, which will deliver relevant ads alongside Yahoo's own natural search results," a Google spokes-man said. "This is only a limited test and does not necessarily mean that Yahoo will join the AdSense programme."

The need to better compete with Google in search-based advertising is at the heart of Microsoft's desire to acquire Yahoo. It said last Saturday that if Yahoo did not agree to the deal in three weeks, it would seek to oust the board and replace it with directors who would vote in favour, and it may lower the price of the offer.

A tense stand-off has developed, with Yahoo's chief executive Jerry Yang repeatedly arguing that the offer undervalues his company. Yahoo has been trying to persuade shareholders that it has a viable future as an independent operator but its most recent strategy presentations have failed to push its shares above the level of the Microsoft offer.

Analysts at Citigroup have calculated Yahoo could boost its annual cashflow by 25 per cent by outsourcing the sale of search ads to Google, because Google has more efficient technology and an agreement would allow Yahoo to cut its own investment in this area. But a tie-up would give Google control of more than 90 per cent of all the advertising sold next to search engine results, putting the deal at risk of being blocked by regulators. Talks in the days after Micro-soft made its hostile offer failed to get off the ground.

Sceptics suggested that Yahoo's renewed flirtation with Google was little more than an attempt to pressure Microsoft to raise its offer.

Herb Kohl, who chairs a Senate anti-trust committee, raised an immediate red flag. "We will be following closely the results of the short-term test alliance," he said "Should there be moves to make this agreement permanent, we will examine it closely to ensure that it does not harm competition."

Brad Smith, Microsoft's general counsel, said: "This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo. We will assess closely all of our options."