New York: April 10, 2008 - Yahoo has played a safe game to keep off a hostile takeover by Microsoft, by announcing that it would outsource its advertising space to Google as part of a short-term deal that could lead to a bigger partnership.

As part of a two-week trial, Google-generated ads will appear next to some U.S. search results on Yahoo (YHOO, Fortune 500). The experiment raises the possibility that Google could run Yahoo's search advertising service.

Yahoo's move - clearly an attempt to show its unwanted suitor that it has other options - was quickly met with resistance. Microsoft general counsel Brad Smith suggested that a formal Yahoo-Google alliance would be anticompetitive, and a powerful Congressman warned that he would be watching the two-week test "closely."

The discussions with Microsoft's biggest rival come less than a week after Yahoo was given a 3-week deadline by Microsoft (MSFT, Fortune 500) to negotiate a proposed $42 billion buyout or face a drawn-out battle for control of Yahoo's board.

The test with Google (GOOG, Fortune 500) attempts to show that Yahoo has some bargaining power as it pressures Microsoft to raise its $31-a-share bid. It also addresses one of Yahoo's biggest challenges: containing costs as the economy slows and revenue growth slips. If Yahoo can find a partner to help carry the expense of the necessary network operations, it may succeed in its plan to expand its own higher-margin banner ad business.

AOL and Time Warner (TWX, Fortune 500) are now in advanced discussions to combine their Internet operations. Google also powers search results for AOL, a Time Warner unit and Fortune.com affiliate. In addition, the New York Times reported Wednesday that Microsoft is talking with News Corp (NWS, Fortune 500). about a joint bid for Yahoo.

The limited scope of the Yahoo-Google test and the potential antitrust issues raised by a collaboration between the two largest search players suggests the move will not necessarily be a deal killer for the Microsoft-Yahoo takeover.

Microsoft fired back Wednesday with a warning that a formal Yahoo-Google alliance would give Google too much control over the the search advertising market. "Any definitive agreement between Yahoo! and Google would consolidate over 90% of the search advertising market in Google's hands," Smith said in a statement. "This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo!"

Meanwhile, Sen. Herb Kohl, a Wisconsin Democrat and chairman of the Senate Judiciary Committee's antitrust subcommittee, said Wednesday he would be "following closely" the Yahoo-Google trial.

"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," Kohl said in a statement issued shortly after Yahoo made the announcement. "

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.
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