Yahoo and Google Nearing Ad Deal?

Yahoo and Google are reportedly getting closer to working out an online advertising deal, following a successful limited run on Google ads on Yahoo sites.

According to reports in the Wall Street Journal and elsewhere (and confirmed in general terms by sources close ot the companies), Internet giants Yahoo and Google are hashing out the details of a deal that would have Google take over a portion of Yahoo’s display advertising business. The news of talks comes after Yahoo and Google launched a limited-time test of running online advertisements from Google’s AdSense service on Yahoo pages; the results have apparently been positive enough that the companies are working on setting up a more expansive deal.

If Yahoo is able to form an advertising partnership with Google, it would add a potentially lucrative revenue stream to Yahoo’s bottom line—a Citigroup analyst has put it in the neighborhood of $1 billion a year—potentially fortifying the company as it tries to forge alternatives to Microsoft’s unsolicited $42 billion offer to take over the company. It would also allow Yahoo to focus on brand marketing activity rather than the display advertising business, and may make it easier for Yahoo to enter into a merger deal with Time Warner’s AOL unit, since Yahoo would no longer be competing with AOL’s display ad business.

Industry watchers speculate any advertising tie-up between Yahoo and Google may face antitrust scrutiny, since Google is the dominant player in online display ads. The companies may have to place restrictions on the types of search queries that would be matched up with ads from Adsense, or potentially limit the integration to specific regions.

In the meantime, the clock is ticking on the three-week deadline Steve Ballmer gave Yahoo to either make a deal with Microsoft or face a hostile takeover effort. Yahoo and several of its largest investors have said they wouldn’t be adverse to a Microsoft takeover, but at a higher price than Microsoft’s proffered $32 per share. Microsoft has made no indication it’s willing to raise the offer; in fact, the company has said it will likely offer less money if it is forced to execute a hostile takeover.

Microsoft’s deadline falls on April 26.