Yahoo rejected Google deal before Microsoft bid

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Yahoo Inc executives dismissed a search-advertising deal with Google due to antitrust concerns, one day before Microsoft Corp made its takeover offer earlier this year, according to court documents made public on Monday.

The position came to light in a complaint filed by attorneys representing two Michigan pension funds in a shareholder lawsuit that aims to revoke Yahoo takeover defenses and press the company to renew merger talks with Microsoft.

"We are focused on long-term value creation rather than short-term gains," said a Yahoo document prepared for Yahoo executives ahead of an "all hands" internal meeting on January 30 -- the day before Microsoft made its merger offer.

Bracing for employee questions over whether Yahoo should outsource its search-ad sales to Google, executives were prepared to argue that any short-term gains would derail Yahoo's long-term push to become a "must buy" for advertisers.

"Short-term analysis of the revenue potential of outsourcing monetization may not take into account the longer term impact on the competitive market if search becomes an effective monopoly," an excerpt from the company document said. Monetization refers to sales of search-related ads.

These comments appear to contrast with Yahoo's subsequent position when it announced on April 9 that it was conducting a test with rival Google, the market leader in Web search and related advertising, to rely on Google to sell its search ads.

TURNABOUT

The turnabout was part of a strategy by Yahoo management to seek alternatives for its business instead of settling for Microsoft's cash-and-stock offer at $31 per share, which the company's board had rejected as undervaluing Yahoo's assets.

Microsoft challenged the possible Google-Yahoo tie-up as anti-competitive, citing Google's growing dominance of the Web search business and its even larger share of ad sales tied to Web search results. Government regulators also rushed to say they would investigate any Google-Yahoo partnership.

Web search is increasingly strategic as most people find information on the Internet via such systems. Search-based advertising, because of its high degree of targeting, has become a great money spinner for Google.

Yahoo has acknowledged that a gap exists between what it makes running its own advertising alongside its search results and the improved payback it could see by using Google's ad-sales systems in conjunction with Yahoo's search operation.

"We, in fact, have some understanding of what they (Google) could do for us and what we could do for them," Yahoo Chief Executive Jerry Yang told a conference last week.