Yahoo may consider Google alliance, source says

By Eric Auchard and Megan Davies

SAN FRANCISCO/NEW YORK (Reuters) - Yahoo Inc would consider a business alliance with Google Inc as one way to rebuff a $44.6 billion takeover proposal by Microsoft, a source familiar with Yahoo's strategy said on Sunday.

Yahoo management is considering revisiting talks it held with Google several months ago on an alliance as an alternative to Microsoft's bid, that source said. At $31 a share, Yahoo believes the bid undervalues the company, two sources said.

A second source close to Yahoo said it had received a procession of preliminary contacts by media, technology, telephone and financial companies. But the source said they were unaware whether any alternative bid was in the offing.

In a memo to Yahoo employees on Friday, which was obtained by Reuters on Sunday, Yahoo leaders wrote: "We want to emphasize that absolutely no decisions have been made -- and, despite what some people have tried to suggest, there's certainly no integration process underway."

Few natural bidders exist besides Google that could engage in a bidding war, and Google would be unlikely to win approval from antitrust regulators, some Wall Street analysts said on Friday.

The Wall Street Journal reported on its Web site on Sunday that Google's chief executive Eric Schmidt called Yahoo's chief executive Jerry Yang to offer his company's help in any effort to thwart Microsoft's bid.

Spokesmen for Yahoo and Google declined comment. Google was not immediately available for comment on the WSJ story.

Yahoo's efforts to find an alternative bidder could simply be a measure to pressure Microsoft to boost its bid, which valued Yahoo at $44.6 billion when first announced on Friday.

Sanford C. Bernstein analyst Jeffrey Lindsay wrote in a research note that "the Microsoft bid of $31 is very astute" because it puts pressure on Yahoo management to take actions that could unlock the underlying value of Yahoo assets, which he estimates are worth upward of $39-$45 a share.

The bid gave a boost to markets in Asia when they opened on Monday. Shares in Softbank Corp soared as much as 16 percent and Yahoo Japan was untraded due to a flood of buy orders on Monday, on hopes a potential deal between Microsoft and Yahoo would boost the Japanese firms' competitiveness. Softbank holds a 3.9 percent stake in Yahoo Inc in terms of voting rights.

The benchmark Nikkei average ended the morning up 2.4 percent while indexes in Shanghai, Hong Kong, South Korea, Taiwan and Singapore also gained.

COMPETITION CONCERNS

Separately, Google fired back on Sunday at Microsoft Corp's bid to acquire Yahoo, accusing Microsoft of seeking to extend its computer software monopoly deeper into the Internet realm.

David Drummond, a Google chief legal officer, said in a blog post that the combination of Microsoft and Yahoo could undermine competition on the Web and called on policy makers to challenge the combination.

Microsoft responded to Google's arguments by saying that a merger with Yahoo would create a "compelling number two competitor for Internet search and online advertising" to market leader Google.