Yahoo has made progress toward outsourcing its search advertising to Google after a positive initial test of the system, the Wall Street Journal reported, citing unnamed sources.
A deal with Google could help Yahoo fend off the $42bn (£21bn) unsolicited takeover bid from Microsoft, although analysts have said such a partnership would raise serious antitrust issues.
If Yahoo were to accept Microsoft's offer, it could just scuttle the deal with Google, people familiar with the matter told the Journal. Yahoo has rejected Microsoft's offer saying it undervalues the company and wants the software company to raise its offer. But Microsoft, growing more impatient, has given Yahoo until April 26 to accept its offer or face a proxy fight.
Yahoo declined to comment on the report. Google could not be reached for comment. However, the sources told the Journal that a Yahoo partnership with Google is now more likely.
Last week, the two companies announced a two-week test in which Yahoo would deliver relevant Web advertising from Google alongside its own search results. Yahoo and Google are looking into a more extensive search-advertising deal, although antitrust experts believe that such a deal would not pass regulatory muster.
A deal with Google would boost Yahoo's cash flow by more than $1bn a year, according to a research note written by Citigroup Global Markets analysts Mark Mahaney and Brent Thrill.
Because of the potential antitrust concerns, the two companies are trying to determine how best to address potential regulatory problems, according to the Journal. Yahoo has also been in talks with Time Warner's AOL business.
Yahoo is scheduled to report its first quarter earnings 22 April. If its earnings are stronger than expected, Yahoo would be able to argue that the company is worth more than what Microsoft has offered. Conversely, weaker results could strengthen Microsoft's position.