Yahoo Goes to Bed with Google

Another shot has been fired in the bitter battle between Microsoft and Yahoo.

The Internet company plans to announce Wednesday afternoon that it will begin a test advertising partnership with Google, people briefed on the plan told DealBook. In the experiment, expected to last for two weeks and applying only to users in the United States, Yahoo will display Google-provided ads alongside its own search results, these people said.

The move is the latest salvo in the two-month battle for control of Yahoo, as the ailing Internet pioneer seeks to thwart Microsoft’s bid – or at least force the software giant to raise its $42 billion price.

Depending on the results of the experiment, Yahoo hopes that it may be able to use it as proof that it can generate additional revenue that would justify a higher bid.

In recent months, Yahoo has discussed possible partnerships or combinations with Google, Time Warner’s AOL and the News Corporation in attempts to fend off Microsoft. Some of those conversations are continuing, people familiar with the matter previously told The New York Times.

Google has long generated far more revenue for every search than competitors like Yahoo and Microsoft. Last year, Yahoo unveiled a new search advertising system, called Panama, which was intended to close the gap with Google. While the system has helped bolster Yahoo’s search revenues, it is not as effective as Google’s.

Some investors have urged Yahoo to outsource its search and search advertising system to Google for years, as it could help Yahoo increase revenues and cut costs. Yahoo executives, however, have resisted the move, saying that search was an essential piece of the company’s business.

After Microsoft made its offer, Eric Schmidt, Google’s chief executive, called his Yahoo counterpart, Jerry Yang, to offer his help in fending off the Microsoft bid. A search or search advertising partnership has been an important part of their discussion, according to people familiar with the situation. Mr. Yang and Yahoo president Susan Decker visited Google in the past two weeks, said a person briefed on their visit.

While the test is intended to show how much Yahoo could earn from such a partnership, legal experts have warned that a broader search or search advertising pact with Google could pose antitrust issues, as it would expand Google’s already dominant position in those businesses.

Does this mean that Google may actually buy Yahoo in the future?