Yahoo to test Google ads as defense vs. Microsoft

By Eric Auchard and Anupreeta Das

SAN FRANCISCO/NEW YORK (Reuters) - Yahoo Inc said on Wednesday it will carry Web search advertising from Google Inc in a test that could put pressure on Microsoft Corp to raise its bid to buy the company.

Yahoo, facing a three-week deadline from Microsoft to reach a deal and eager for a higher offer, also is still in talks with Time Warner Inc's AOL about a potential tie-up, a source familiar with the discussions said.

The two-week test with Web search leader Google would involve Yahoo targeting Google Web search advertisements at 3 percent of the users of Yahoo's own search services.

Microsoft fired back saying that a deal between Yahoo and Google would make the market for Web search less competitive -- turning the tables on Google, which has charged Microsoft with anti-competitive practices in the past. Microsoft would face tough scrutiny of its own from regulators if it buys Yahoo.

Microsoft General Counsel Brad Smith said Yahoo and Google would consolidate more than 90 percent of the search ad market in Google's hands. Herb Kohl, the Democratic head of the U.S. Senate antitrust subcommittee, chimed in to say he was watching Yahoo's deal closely to "ensure 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. Yahoo shares rose 7 cents to close at $27.77, Microsoft gained 14 cents to $28.89, and Google fell 0.8 percent to $464.19.

Based on current stock prices, the value of Microsoft's proposed cash-and-stock bid for Yahoo is $42.1 billion.

"This doesn't put an end to the negotiations, but it perhaps balances things out," Cowen and Co analyst Jim Friedland said. "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."