Microsoft May Go Hostile, Yahoo May Announce Google Search Deal

After a pretty quiet several weeks, the Microsoft-Yahoo battle is suddenly getting a lot louder. After Microsoft CEO Steve Ballmer said early Thursday he might walk out on its offer to buy Yahoo, the Internet portal floated the likelihood of a Google search ad deal. Then late Thursday night, Microsoft came right back with a leak in the Wall Street Journal that it’s leaning toward a hostile deal as early as Friday.

Sure sounds like a denouement of some kind is at hand, doesn’t it? Or not—remember, this corporate volleyball has been for three solid months now. But the more each company jabs the other, somehow, the closer they seem to be entwining themselves. It’s a conclusion Silicon Alley Insider’s Henry Blodget also reaches today.

Here’s the latest:

After a successful two-week trial, Yahoo as early as next week could go ahead with a deal to run Google search ads alongside its search results. A source close to the matter tells me the potential deal, first reported by the Wall Street Journal tonight, is “very far along” and represents a substantial step, not merely a negotiating tactic that many have assumed.

However, on a day on which Microsoft CEO Steve Ballmer again insisted he could drop the Yahoo bid if they can’t find common ground on a purchase price, there’s little doubt that, whatever else it is, this particular leak from Yahoo was also intended to put the pressure back on Microsoft. With the up to $1 billion in annual cash flow that a full-fledged Google search ad deal could bring to Yahoo, it could give Yahoo shareholders some small reason to think the company could go it alone or, more likely, prompt them to put further pressure on Microsoft to up the bid.

Earlier today, Ballmer had repeated to his employees in a town hall meeting that Microsoft could go in one of three directions—launch a hostile proxy fight to replace Yahoo’s board, come to some agreement with Yahoo, or walk away. Most observers have assumed, logically, that Microsoft won’t walk away permanently, and that a proxy fight would be more likely to be a prelude to a deal than an all-out assault on Sunnyvale. Locked in a fierce battle with Google over the future leadership of the Internet, Microsoft may not be able to afford the weeks or months of delay a truly hostile approach would entail.

According to the Journal, Yahoo and Google hope to avoid regulatory concerns by using an auction system that would run the most lucrative ads from any company, even Microsoft, that could be part of the system. I haven’t confirmed that particular detail yet, but Yahoo’s Right Media exchange might offer a path to such a system, which might indeed pass muster with regulators if it’s open to all comers. Of course, what’s open is a Google system to which everyone else becomes beholden, so it’s unlikely Microsoft would have any part of it, but appearances are what matter here when it comes to the feds.

Despite the Yahoo-Google deal, if it happens, Yahoo and Microsoft could still come to an agreement. A source tells me talks among a wide variety of people on both sides have been ongoing—talks much more extensive than have been reported so far.

It’s not clear that those talks became any more serious this week than before. But it does seem clear the two companies prefer to come to some agreement more than they want to spend the next few months gradually ratcheting up hostilities while Google steals a march on their only hope to counter the search giant, online display advertising. The hangup, as it has been from the beginning three months ago to the day, remains price.

And although it has appeared in recent days that the two sides might be closing in on a price for Yahoo stock somewhere in the mid-30s, it turns out the dance wasn’t over. As predictable as this merger minuet has been all along, the one thing that’s entirely unpredictable is when it will end.

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