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Google, Yahoo! Pact Looks Likely

The key to a deal is hammering out an agreement on propietary information.

SAN FRANCISCO -- Internet behemoth


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is expected to work out a deal with



, but it still has concerns over sharing proprietary information with its Web-search rival.

A source familiar with the situation said Thursday a deal is more likely to happen than not, but the two companies are trying to come up with an arrangement that would prevent Yahoo! from gaining knowledge of Google's heavily guarded system for search ads and using it to benefit its own lagging business.

Yahoo! had outsourced less than 3% of its online U.S. ads to Google in a two-week test last month, however, neither companies have revealed the results. Yahoo! made the move in an attempt to avoid an unsolicited merger with


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Microsoft backed away from the merger, on Saturday, withdrawing its last offer worth $47.5 billion -- in part because of Yahoo!'s attempt to tie-in its ads with Google. In a letter to Yahoo!, Microsoft Chief Executive Steve Ballmer wrote that he was concerned about the two-week test with Google and any longer-term relationship that might come out of it.

"In our view, such an arrangement with the dominant search provider would make an acquisition of Yahoo! undesirable to us," he said, maintaining that Yahoo! would fundamentally undermine its own strategy and long-term viability.

Ballmer added that the arrangement would also "raise a host of regulatory and legal problems that no acquirer, including Microsoft, would want to inherit."

Neither Yahoo! nor Google has publicly stated where their two-week test might lead, but many analysts have speculated that a deal would help save Yahoo!'s stagnated business and help pump revenue back into the company.

A source notes that in most of the scenarios discussed between the two companies, Yahoo! would only outsource some of its ads to Google, retaining the rest for its own business, along with the option of outsourcing to other companies if it chooses. The arrangement would be similar to that between Google and, a division of

IAC/InterActive Corp



This might alleviate antitrust concerns, but probably not enough to placate Microsoft, which has repeatedly spoken out against any tie-ins between Google and Yahoo!. Microsoft has maintained that any arrangement between the two would consolidate over 90% of the search advertising market in Google's hands.

Yahoo! had previously outsourced its online ads to Google before coming up with its own system called Panama. But its attempts to monetize search -- as well as any other company in the industry -- never came close to Google's success.