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Google keen on stronger Yahoo ties

TEAMING UP?An alliance between the two Internet giants could help Yahoo to snap out of a prolonged slump that has made it a buyout bid target for Microsoft

AP , MOUNTAIN VIEW, CALIFORNIA

Google Inc’s top executives on Thursday expressed hope that the Internet search leader will be able to form a potentially lucrative advertising partnership with Yahoo Inc — a deal that would lower the odds of Microsoft Corp renewing its attempts to buy Yahoo.

“We have been talking to Yahoo and we are very excited to be working with them,” Google co-founder Sergey Brin told reporters before the company’s annual shareholders meeting. “We share a lot of values with them.”

Neither Google chairman Eric Schmidt nor Brin would indicate how far along the two sides are in their negotiations after a two-week test was completed last month. During the trial run, Google supplied a small portion of the text-based ads that appeared alongside the search results on Yahoo’s Web site.

Because Google’s technology proved it could select more profitable ads, the alliance could help Yahoo snap out of a prolonged slump that made it vulnerable to Microsoft’s buyout bid. Microsoft orally raised the bid to US$47.5 billion, or US$33 per share, before pulling it off the table last weekend.

Microsoft cited Yahoo’s willingness to subordinate its own ad system to Google’s as a major reason for dropping its bid.

Google suggested the ad partnership to Yahoo as a weapon to fend off Microsoft.

“We really believe in companies having choices about their destinies,” Brin said. “It’s not about scuttling [the deal]. They were under a hostile attack and we wanted to make sure they had as many options as possible.”

Schmidt left little doubt that Google was pleased to spoil the deal, however. He said he wanted to keep Yahoo out of Microsoft’s hands largely because he was concerned the software maker would abuse the added power it would acquire in e-mail and instant messaging to limit consumer choices.

“Obviously, we are happy that is not going to happen,” Schmidt said. He described Google’s current relationship with Yahoo as “very, very friendly.”

If Yahoo were to sign a long-term ad deal with Google, some analysts believe that would repel Microsoft for good. Although Microsoft executives have publicly indicated they are looking for other ways to bolster the software maker’s unprofitable Internet operations, some investors still suspect another bid may surface if Yahoo continues to struggle in the months ahead.

The hopes for another bid have helped cushion the blow to Yahoo’s stock since Microsoft walked away. Yahoo shares rose US$0.58 to finish on Thursday at US$26.22 — 8.5 percent below their price when Microsoft made its last bid.

A partnership between Google and Yahoo almost certainly would face antitrust scrutiny because the two companies together control more than 80 percent of the US market for online search advertising.

The US Justice Department has already made inquiries about the two-week test they conducted.

“If there were a deal [with Yahoo], we would anticipate structuring the deal to address the antitrust concerns that have been widely discussed,” Schmidt said.

Although Schmidt wouldn’t specify how Google might address the antitrust issues, analysts have speculated that it could be done by running the partnership as an auction-style system that would allow other rivals to show ads on Yahoo.

Depending on the breadth of the partnership, Google’s ad system could nearly double profit next year, UBS analyst Benjamin Schachter estimated in a research report released on Thursday.

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