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Yahoo! Reaches Out to Google

The Internet giant wants to see if can outsource its search ads to Google.
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Updated since 4:05 PM EST

SAN FRANCISCO - In a potential alternative to

Microsoft's

(MSFT) - Get Report

offer,

Yahoo!

(YHOO)

is working on a deal with

Google

(GOOG) - Get Report

that would allow it to outsource its search ads.

Yahoo! on Wednesday confirmed that it will begin a limited test of Google's AdSense, which will deliver relevant Google ads alongside Yahoo!'s search results.

The test, which will last up to two weeks and will be limited to 3% of Yahoo!'s search queries, will apply only to the company's traffic in the U.S. and will not include its extended network of affiliate or premium publisher partners.

Yahoo! noted that the testing "does not necessarily mean that Yahoo! will join the AdSense for Search program or that any further commercial relationship with Google will result."

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Outsourcing search ads is one of several options Yahoo! had been entertaining soon after Microsoft made its $31-a-share bid for the company in February, although many analysts had dismissed the possibility of a deal with Google due to anti-trust concerns.

Indeed, that is the tack that Microsoft took in its sternly worded response to Yahoo!'s plan. It said any agreement between the two "would consolidate over 90% of the search advertising market in Google's hands" and "make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo!"

If Yahoo! does work out an agreement, it could result in higher revenue for the company since Google has had far more success with its search ads than its rivals. It could also give Yahoo! the alternative it needs to convince shareholders that Microsoft might not be its best option.

It's not clear whether shareholders will bite. Yahoo!'s stock had been in a slump prior to Microsoft's offer and is expected to fall even lower if the deal does not go through.

There's also the potential of Microsoft sweetening its bid, although the software giant has said as recently as four days ago that it is sticking to its original offer and might even lower it if it ends up having to approach shareholders directly.

But Google might at least give shareholders some food for thought. Citigroup analyst Mark Mahaney in February had noted that Google may be Yahoo!'s only viable option to remain independent "as it could potentially deliver well in excess of 25% accretion to YHOO's cash flow."

Yahoo! has explored other options, including talks with

News Corp.

(NWS) - Get Report

and

Time Warner's

(TWX)

AOL. But neither of those companies is considered to be a worthy alternative considering how much money Microsoft has been willing to put down for Yahoo!.

Shares of Yahoo! closed up 0.25%, or 7 cents, to $27.77. Microsoft's shares were up 0.49%, or 14 cents, to $28.89.