April 12 (Bloomberg) -- Yahoo! Inc., after agreeing to test Internet search advertising technology from chief rival Google Inc., insists the trial run is just that.

``Let me be clear about our commitment to search,'' President Sue Decker wrote to employees in an April 9 e-mail obtained by Bloomberg News. ``We have every intention of being a significant player in search, and paid search is an important part of our business.''

Amid criticism that Yahoo's efforts have fallen short in wringing more money from Internet search ads, Decker and Chief Executive Officer Jerry Yang agreed this week to try Google's software as they negotiate alternatives to Microsoft Corp.'s $44.6 billion takeover offer. Yahoo's directors met yesterday to consider the bid, a person familiar with the talks said.

Yahoo spent more than $2 billion on acquisitions to build its own search engine, and released a program last year called Project Panama to make search ads more relevant and more likely to be clicked by users. Now, Yahoo is acknowledging that Google still does it better, said Canaccord Adams analyst Colin Gillis.

``What does this actually prove except to show how much Panama is lagging?'' said New York-based Gillis, who recommends buying Google and Yahoo shares and doesn't own them. ``They're going to have some nice hard data into how much they're behind.''

Revenue Gap

More than half of the $41 billion online advertising market comes from Internet search ads, according to Piper Jaffray & Co. Google captured 77 percent of spending in the fourth quarter, compared with Yahoo's 18 percent and Microsoft's 5 percent, said Efficient Frontier Inc., a Mountain View, California-based company that manages online ad campaigns.

Yahoo, owner of the second most-used search engine, said in a presentation to investors last month that it narrowed the gap in the amount of revenue generated from each search query by 30 percent in the first nine months of last year. Google still made as much as 70 percent more in sales from each query at the end of 2007, Sunnyvale, California-based Yahoo said.

``We are seeing measurable progress as a result of our Panama rollout, and we continue to enhance our paid search platform,'' Decker, 45, wrote.

Yahoo spokeswoman Tracy Schmaler wouldn't comment beyond reiterating Decker's commitment to search.

Swap a Stake

Yahoo fell 25 cents to $28.34 yesterday on the Nasdaq Stock Market. The shares are little changed since surging 48 percent on Feb. 1, the day of Microsoft's bid. Google, based in Mountain View, slid $11.63 to $457.45, and Redmond, Washington-based Microsoft dropped 83 cents to $28.28, and is 21 percent down since the start of the year.

Yahoo also considered a plan this week to swap a 20 percent stake in the company for control of AOL, plus a cash investment from AOL parent Time Warner Inc., a person with knowledge of the talks said. The investment would let Yahoo buy back billions of dollars in stock, the person said.

The board agreed to additional meetings, probably next week, with Microsoft and Time Warner, the New York Times reported, citing people briefed on the board's discussion.

Still, a takeover by Microsoft, the world's largest software maker, is the most likely outcome, said analysts including Stanford Group Co.'s Clay Moran in Boca Raton, Florida.

Board Split

Yahoo's 10 directors, who are up for re-election at the next shareholder meeting, are split between members who have served for more than a decade and relative newcomers. Yang, 39, Eric Hippeau and Arthur Kern have been on the board since before Yahoo's initial public offering in April 1996.

``It's quite possible that the first instinct of people who've been there from the outset would be to look to see if keeping the company independent would be viable,'' said Jeffrey Lindsay, an analyst at Sanford C. Bernstein & Co. in New York. ``The newer members don't have the same sentiment or associations with the company.''

Yahoo and Google have partnered for Internet search software before. In 2000, Yahoo chose Google as its default search engine. That lasted until 2004, when Yahoo switched to technology based on the acquisitions of Inktomi Corp. and Overture Services Inc.

Lindsay says outsourcing search ads to Google, a move he's recommended since September, could boost Yahoo's stock to as much as $45.

While a partnership may cut Yahoo's costs, a deal would face regulatory scrutiny.

U.S. Senator Herb Kohl, the Wisconsin Democrat who heads the Senate Judiciary Committee, said he will examine any formal agreement to ``ensure that it does not harm competition.'' Microsoft echoed that possibility after the announcement.

``Any definitive agreement between Yahoo and Google would consolidate over 90 percent of the search advertising market in Google's hands,'' Microsoft General Counsel Brad Smith said in an April 9 statement. ``This would make the market far less competitive.''

Conducting the test with Google doesn't necessarily mean the companies will strike a formal partnership, Decker said in her memo.

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

Last Updated: April 12, 2008 12:13 EDT