Yahoo may consider Google alliance, source says

SAN FRANCISCO (Reuters) - Yahoo Inc would consider a business alliance with Google Inc as one way to rebuff a $44.6 billion takeover proposal by Microsoft, a source familiar with Yahoo's strategy said on Sunday.

Yahoo management is considering revisiting talks it held with Google several months ago on an alliance as an alternative to Microsoft's bid, that source said. At $31 a share, Yahoo believes the bid undervalues the company, two sources said.

A second source close to Yahoo said it had received a procession of preliminary contacts by media, technology, telephone and financial companies. But the source said they were unaware whether any alternative bid was in the offing.

A Google search page is seen through the spectacles of a computer user in Leicester, central England, in this file photo from July 20, 2007. Web search leader Google said on Friday that it would participate in an upcoming wireless spectrum auction if the U.S. Federal Communications Commission added a key condition. REUTERS/Darren Staples

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In a memo to Yahoo employees on Friday, which was obtained by Reuters on Sunday, Yahoo leaders wrote: "We want to emphasize that absolutely no decisions have been made -- and, despite what some people have tried to suggest, there's certainly no integration process underway."

Few natural bidders exist beside Google that could engage in a bidding war, and Google would be unlikely to win approval from antitrust regulators, some Wall Street analysts said on Friday.

The Wall Street Journal reported on its Web site on Sunday that Google's chief executive Eric Schmidt called Yahoo's chief executive Jerry Yang to offer his company's help in any effort to thwart Microsoft's bid.

Spokesmen for Yahoo and Google declined comment. Google was not immediately available for comment on the WSJ story.

Yahoo's efforts to find an alternative bidder could simply be a measure to pressure Microsoft to boost its bid, which valued Yahoo at $44.6 billion when first announced on Friday.

Sanford C. Bernstein analyst Jeffrey Lindsay wrote in a research note that "the Microsoft bid of $31 is very astute" because it puts pressure on Yahoo management to take actions that could unlock the underlying value of Yahoo assets, which he estimates are worth upward of $39-$45 a share.

Separately, Google Inc fired back on Sunday at Microsoft Corp's bid to acquire Yahoo Inc , accusing Microsoft of seeking to extend its computer software monopoly deeper into the Internet realm.

David Drummond, a Google senior vice president and its chief legal officer, said in a blog post that the combination of Microsoft and Yahoo could undermine competition on the Web and called on policy makers to challenge the combination.

Microsoft responded to Google's arguments by saying that a merger with Yahoo would create a "compelling number two competitor for Internet search and online advertising" to market leader Google.

"The alternative scenarios only lead to less competition on the Internet," Microsoft General Counsel Brad Smith said in a statement.

Drummond argued that Microsoft's power stems from decades- old monopolies in Windows -- the software operating system used to control most personal computers -- and Internet Explorer, which is the dominant browser consumers used to view the Web

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Microsoft's hostile bid for Yahoo has caused tensions with arch-nemesis Google to boil over, with the search giant warning the planned merger could threaten the openness of the internet.

The two technology titans have taken pot shots at each other over the years - the most extreme example of which was when Microsoft CEO Steve Ballmer allegedly vowed to "f---ing kill Google" - but Google has largely avoided returning fire publicly.

But all bets were off after Microsoft launched a $US44.6 billion ($50 billion) unsolicited bid for Yahoo, the world's most popular internet portal and one of Google's main competitors.

"Microsoft's hostile bid for Yahoo raises troubling questions," said David Drummond, senior vice-president of corporate development at Google and the search giant's chief legal officer.

"Could Microsoft now attempt to exert the same sort of inappropriate and illegal influence over the internet that it did with the PC?

"While the internet rewards competitive innovation, Microsoft has frequently sought to establish proprietary monopolies - and then leverage its dominance into new, adjacent markets."

In response, Microsoft general counsel Brad Smith said the takeover would in fact create a more competitive marketplace by establishing a "competitive No.2" to take on Google in online search and advertising.

It is unusual for Google to weigh into the matter so early - Yahoo has yet to respond to the bid - but some are interpreting the move as payback after Microsoft in April last year urged US and European regulators to consider scuttling Google's plan to buy DoubleClick, an online advertising company.

A marriage between Microsoft and Yahoo would allow the former to compete far more effectively against Google in the online advertising space, search and internet applications.

For Yahoo, the takeover could help the brand return to its former glory during the dotcom boom, before Google out-engineered it with a superior search offering.

As well, it would be difficult for Yahoo's board to turn down the unsolicited offer, which represents a 62 per cent premium over the struggling company's market value. Microsoft and Yahoo have discussed the possibility of an alliance in the past but Yahoo eventually rejected the advances.

It is understood that Google, which dominates the global online search and advertising industry with a market share of more than 60 per cent, would be prevented by US regulators from making a competing offer for Yahoo for anti-competitive reasons