Microsoft May Be Running Out of Time on Yahoo Deal

May 2 (Bloomberg) -- Microsoft Corp. Chief Executive Officer Steve Ballmer may be running out of time to clinch his proposed purchase of Yahoo! Inc. as the Internet company forges tighter ties with Google Inc.

Microsoft was leaning toward making a hostile bid as of last night, the Wall Street Journal reported, citing people familiar with the matter. Yahoo may agree to use Google's Web advertising software within a week, the newspaper reported. The decision would build on a test program the companies ran last month.

After three months of pressing Yahoo to give up looking at alternatives and agree to a deal with Microsoft, Ballmer faces a potential setback. An accord with Google may spur Yahoo's sales and give it a better chance of staying independent, pressuring Microsoft to raise its $44.6 billion bid.

``The board and management of Yahoo are trying to retain independence at all costs,'' said Laura Martin, an analyst at New York-based Soleil Securities Corp. who has a ``hold'' rating on Yahoo shares.

Yahoo's test of Google's ad system initially applied to 3 percent of its search queries. If the company extends that to all of them, it may generate more than $1 billion in incremental cash flow, Citigroup Inc.'s Mark Mahaney said in a report last month.

The San Francisco-based analyst, who advises investors to buy Yahoo, said then that the deal might force Microsoft to boost its $31-a-share bid. Last month, Ballmer gave Yahoo a deadline to negotiate a deal at the original price, which the Internet company ignored.

Walk Away

Ballmer said yesterday that he would walk away from the purchase before he overpays for Yahoo, the Sunnyvale, California- based owner of the second-most popular Internet search engine.

``I know exactly what I think Yahoo is worth to me, exactly,'' Ballmer said in a meeting with employees, according to remarks provided by spokesman Frank Shaw. ``I won't go a dime above, and I will go to what I think it's worth if that gets the deal done.''

Yahoo spokeswoman Tracy Schmaler and Google spokesman Adam Kovacevich declined to comment. Shaw didn't return a call late yesterday.

Yahoo has repeatedly turned down the bid since Microsoft's first approach Jan. 31. Microsoft, the world's biggest software maker, would use the takeover to bolster competition with Google, the leader in the $41 billion online advertising market.

Jerry Yang, Yahoo's CEO, has said the offer is too low. Ballmer, who gave the company until April 26 to agree to a deal, let the deadline pass without taking action.

Microsoft's Options

Redmond, Washington-based Microsoft may make a friendly deal with Yahoo, start a proxy fight to replace Yahoo's board or abandon the bid, Ballmer said at the meeting. The company will make an announcement in ``very short order,'' he said.

``Not getting this done is putting a substantial amount of pressure on him,'' said Rob Enderle, president of the research firm Enderle Group in San Jose, California.

Microsoft rose 8 cents to $29.48 in trading before exchanges opened after closing at $29.40 on the Nasdaq Stock Market. The shares have dropped since Jan. 31, pulling the value of the half- cash, half-stock deal to $29.48, based on yesterday's close. Yahoo climbed 89 cents to $27.70 in early trading.

Google may be using its Yahoo partnership to delay the deal, Enderle said.

``Google wants it to go as long as possible,'' he said. ``The longer this goes on, the happier Google is.''

Google Fights

Yahoo said last month that it would test displaying ads sold by Google next to Internet search results. The trial would last as long as two weeks, the company said.

Google, Yahoo and Microsoft sell text links that appear next to search results, charging advertisers when they are clicked. Google generates more revenue from each search query, so a partnership may boost Yahoo's revenue.

Yahoo and Google may strike a nonexclusive partnership, meaning that the system could display ads from competitors, including Microsoft's, the Journal said. That approach is designed to keep antitrust authorities from blocking the deal, the newspaper said.

The U.S. Justice Department is reviewing the initial test, Mountain View, California-based Google said last month. The U.S. Senate Judiciary Committee would examine any formal partnership between Google and Yahoo, Chairman Herb Kohl, a Wisconsin Democrat, said last month.

``Regulators will not allow this,'' Soleil's Martin said. ``It would put all of Internet advertising into the hands of Google, the predominant search marketer on the Web.''

To contact the reporter on this story: Amy Thomson in New York at athomson6@bloomberg.net; Jonathan Thaw in San Francisco at jthaw@bloomberg.net