Yahoo said to step up talks with Google

Yang told Yahoo employees in an e-mail that the board of directors was evaluating "a wide range of potential strategic alternatives" and had "made no decisions" about the Microsoft bid, according to a filing with the Securities and Exchange Commission. He did not offer specifics, but the Sunnyvale, Calif.-based Internet company has hired investment banks Goldman, Sachs & Co. and Lehman Bros. to evaluate options.

Analysts said Yahoo's best hope for maintaining its independence would be a search advertising pact with Google, which generates significantly more revenue for each search query than does Yahoo. Although it could raise antitrust concerns, such a pact could open the door for rival bids, other financing deals or a sweetened offer from Microsoft.

Neither company would comment on the discussions.

No "white knights" have emerged, with News Corp. and others saying they were not interested.

"Jerry is as motivated as hell to try anything he can," a person familiar with the matter said. "Google is hyper-competitive and it wants to do anything it can, any time it can, to stop Microsoft from getting one foot in the door."

Former executives say Yahoo has long considered turning over its search advertising business to Google, most recently in Europe. Doing so would mean that Google would place paid ads on Yahoo search pages, and the two companies would share the money generated. That would dramatically increase revenue and cut costs for Yahoo, a step that analysts have long called for.

Google generated 71.2% of U.S. search-advertising revenue in 2007, dwarfing Yahoo's 8.9%, according to research firm EMarketer Inc. A Citigroup Inc. analyst estimated that Yahoo could boost its cash flow by 25% by outsourcing its search business to Google.

Mountain View, Calif.-based Google has determined that it cannot bid for Yahoo because of regulatory hurdles. Even a partnership between the two biggest search providers would raise concerns about competition in online advertising, antitrust experts said. But such a deal could help Yahoo regain investor confidence, which has slipped as it continues to struggle under Yang's leadership. Yang, who co-founded Yahoo, took over for ousted CEO Terry Semel last summer.