SAN FRANCISCO (MarketWatch) -- Microsoft Corp.'s struggle to buy Yahoo Inc. saw another potential complication Wednesday after Yahoo said it will begin using Google Inc.'s search-advertising service on a limited, test basis.
The move promptly drew a response from Microsoft
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, which blasted any proposed alliance between Yahoo and Google in the search market as potentially anticompetitive.
Yahoo's
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announcement comes as it explores a number of options to bolster its value as an independent company, while dealing with Microsoft's increasingly aggressive acquisition bid. Another of those options may be combining Internet operations with Time Warner Inc.'s
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AOL unit, according to a report by The Wall Street Journal on Wednesday night.
The same report said Microsoft was in talks with media giant News Corp.
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for a potential joint-bid for Yahoo, but gave no further details. News Corp. is the owner of the Journal and of MarketWatch, publisher of this report.
According to the Journal, Time Warner would fold AOL into Yahoo and make a cash investment in return for about 20% of the combined entity. The deal wouldn't include AOL's dial-up access business and values AOL at about $10 billion, the Journal said.
As part of the deal, Yahoo would use cash from Time Warner and other sources to buy back several billion dollars' worth of its stock for between $30 and $40 a share, the Journal said.
Earlier Wednesday, in a statement after the closing bell, Yahoo said it will begin a "limited test" of Google's AdSense service, with Google
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delivering ads through related searches done on Yahoo's Web site. Google already has such deals, which divide resulting revenue among the companies, with search providers including Ask.com
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and AOL.
Yahoo said the test will last up to two weeks, involve traffic only on its site in the U.S. and relate to no more than 3% of its search queries.
Yahoo also noted that the test "does not necessarily mean that the company plans to join Google's AdSense for Search program or that any further commercial relationship with Google will result," adding that it will not comment on "the nature or timing of any potential relationship."
But Microsoft General Counsel Brad Smith immediately responded by complaining that the agreement "would consolidate over 90% of the search advertising market in Google's hands."
"This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo," Smith said in a written statement. "We will assess closely all of our options. Our proposal remains the only alternative put forward that offers Yahoo shareholders full and fair value for their shares."
The tit-for-tat exchange had little impact on Microsoft and Yahoo's stock. Microsoft was up a fraction after hours, while Yahoo was down slightly. The latest development only heightens uncertainty about the future of the proposed merger.
"The plot thickens," said analyst Gene Munster of Piper Jaffray.
Over the weekend, Microsoft CEO Steve Ballmer gave the Yahoo board three weeks to negotiate or face the possibility of a proxy battle and a lower offer price. Yahoo CEO Jerry Yang and Chairman Roy Bostock fired back, saying Microsoft's current offer is too low and dismissed Ballmer's threat as "counterproductive."
See full story.
Analyst Crawford Del Prete of International Data Corp. said that with the latest initiative, Yahoo clearly is not giving up in trying to find an alternative to a marriage with Microsoft.
"To me, it's basically a shot back at Microsoft that Yahoo is willing to explore other creative models as a way to accelerate revenue growth and valuation," he said. "Microsoft's response is not surprising. The reason they are jumping into this is to try to gain more of a foothold in the digital marketplace. Anything that Yahoo does that brings them closer to Google is going to be threatening to them."
Microsoft's bid was worth roughly $44.6 billion in cash and stock when it was made in early February. Yahoo had been in talks with Google about a search-ad outsourcing deal prior to the bid, according to published reports. Such a move has long been touted by many Yahoo investors, who see it as a way to boost revenue while receding from a search advertising market where it's faced daunting competition. Others see the move as merely a short-term fix.
See related story.
Yahoo's announcement Wednesday also drew the attention of U.S. Sen. Herb Kohl, chairman of the Senate Judiciary Committee's Subcommittee on Antitrust, Competition Policy and Consumer Rights, who said the body will be "following closely the results" of its alliance with Google.
"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," Kohl said in a statement.
Benjamin Pimentel is a MarketWatch reporter based in San Francisco.
John Letzing is a MarketWatch reporter based in San Francisco.