May 3, 2008 9:20 PM PDT

Yahoo-Google ad deal could be announced next week

Posted by Stephen Shankland

Apparently Yahoo wasn't just bluffing with its plan for an ad deal with rival Google.

The search company had planned to announce the partnership by midweek, a source familiar with the plan said. Under the deal, Google would supply text ads next to Yahoo search results; Yahoo conducted a limited-scope test of the Google ads for two weeks in April.

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How exactly the potential partnership could come to fruition remains unclear with Microsoft walking away from its Yahoo acquisition offer.

On the one hand, Microsoft's withdrawal reduces some urgency and gives Yahoo more flexibility to chart its own course. On the other hand, Microsoft's attempt to acquire Yahoo has raised shareholder expectations for where the search pioneer's stock price should be.

Citigroup analyst Mark Mahaney and colleagues estimated in a February report that Yahoo makes less than 4 cents per click on its search ads to more than 9 cents for Google, so sharing could help Yahoo generate more cash and help Google deliver more ads.

Pairing the No. 1 and No. 2 search-ad companies could raise antitrust issues, but Yahoo had planned to address the situation by offering an open system in which others besides just Google could offer ads, the source said. It would employ a dynamic bidding system that would place the ad that would generate the highest revenue. It's unclear whether Yahoo has extended any offers to others, such as Microsoft, to participate.

Yahoo declined to comment on the planned announcement.

Microsoft Chief Executive Steve Ballmer was not so restrained. In a letter to Yahoo Chief Executive Jerry Yang Saturday, Ballmer criticized the Google ad deal as a key reason the company didn't want to make a "hostile" bid to acquire Yahoo.

"Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo undesirable as an acquisition for Microsoft," Ballmer said. The deal would undermine Yahoo's own ad system, make it hard to retain employees, and increase Google's power in search ads even more, he said.