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Yahoo to Test-Drive Google's AdSense

For more than two months, Yahoo's official line about Microsoft's unsolicited bid is that it is exploring "strategic alternatives." The pundits (and some shareholders) would argue that no viable alternative exists to the offer from Microsoft.

But today, Yahoo made a move. The Web pioneer announced that it was conducting a trial of Google's AdSense for Search product to place ads alongside Yahoo's search results.

Outsourcing search advertising to Google (NASDAQ: GOOG) has been a long-simmering rumor as one of Yahoo's few options to remain independent in light of the acquisition bid, which represented a 62 percent premium over Yahoo's value at the time.

The news carries a twist of irony. It was Yahoo's Overture division that invented the concept of pay per click contextual adverting. It even has a patent on it, which Google now licenses from Yahoo as part of a 2004 settlement.

The AdSense revelation follows an ultimatum that Microsoft CEO Steve Ballmer issued to Yahoo over the weekend, giving the company three weeks to come to the bargaining table in good faith or face Microsoft turning hostile with the nomination of a slate of directors to oust Yahoo's board. Yahoo responded with a listing of the reasons why it felt the bid undervalued the company's worth. Many analysts are skeptical about how long shareholders will remain patient with the company's turnaround strategy.

Microsoft, which touted the combination of the two companies as the only viable path to creating a legitimate No. 2 competitor in search advertising, predictably blasted the announcement.

"Any definitive agreement between Yahoo and Google would consolidate over 90 percent of the search advertising market in Google's hands. This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo," Brad Smith, Microsoft's general counsel, wrote in a statement.

"Our proposal remains the only alternative put forward that offers Yahoo shareholders full and fair value for their shares, gives every shareholder a vote on the future of the company, and enhances choice for content creators, advertisers, and consumers," Smith added. [cob:Special_Report]

To be sure, the U.S. Federal Trade Commission would take a hard look at any advertising alliance between Google and Yahoo to consider the anti-competitive pressures that might bring to the market. In its public comments spurning Microsoft's offer, Yahoo has cited the unknown expense that it would incur in making its case to U.S. and foreign regulators defending a combination of those companies.

Yahoo was clear that today's announcement is by no means a definitive commitment to enter into a business agreement with Google.

Rather, it said that it expects the trial to last as long as two weeks, and that Google's technology would place ads on no more than 3 percent of its search queries.

The AdSense trial will not apply to any of Yahoo's affiliate or premium publishing partners, and will be limited to traffic from Yahoo.com within the United States.