Yahoo to test Google ads as faces Microsoft deadline

SAN FRANCISCO/NEW YORK (Reuters) - Yahoo Inc said on Wednesday it will carry Web search advertising from Google Inc in a test that could put pressure on Microsoft Corp to raise its bid to buy the company.

Yahoo, facing a three-week deadline from Microsoft to reach a deal and eager for a higher offer, also is still in talks with Time Warner Inc's AOL about a potential tie-up, a source familiar with the discussions said.

Investors barely reacted to what was seen as Yahoo's latest effort to force Microsoft to raise its $42 billion bid. Yahoo shares rose 7 cents to $27.77, Microsoft gained 14 cents to $28.89, and Google fell 0.8 percent to $464.19, all on Nasdaq.

"Yahoo has made a really clever move here. It looked like Microsoft had all the cards, Yahoo is at least now able to use this for leverage to get Microsoft to pay more," Cowen and Co analyst Jim Friedland said.

A deal with Google would boost Yahoo's cash flow by reducing spending on rival technology and allowing it to redirect staff and resources into its larger business selling corporate brand advertising such as banner ads, he said.

But even if Yahoo did turn over Web search advertising entirely to Google, a long-term deal would still do nothing to stem the decline in numbers of Web searchers using its site.

Yahoo faces a three-week deadline issued by Microsoft Chief Executive Steve Ballmer in a letter to Yahoo on Saturday for Yahoo to agree to its offer or risk seeing the bid lowered and Microsoft starting a proxy battle to take over the board.

In the test, Yahoo will deliver Google ads alongside Yahoo's search results and Google's search queries will be limited to no more than 3 percent of queries, Yahoo said. The test will last up to two weeks.

A Google spokeswoman confirmed the test plans.