23 October 2011

Google Inc. has talked to at least two private equity firms about potentially helping them finance a deal to buy Yahoo Inc.'s core business, according to a person familiar with the matter.

Google and prospective partners have held early-stage discussions but haven't put together a formal proposal and Google may end up not pursuing a bid, this person said. It's unclear which private equity firms Google has talked to.

Any deal tying two of the biggest Internet companies would be sure to attract antitrust scrutiny.

Federal antitrust lawyers in 2008 thwarted a Web-search advertising partnership between the companies. A year later Yahoo signed a 10-year search partnership with Microsoft Corp.

Microsoft is now considering financing part of a bid for Yahoo by a private equity firm, people familiar with the matter have said.

Yahoo declined to comment.

Yahoo's board of directors fired Chief Executive Carol Bartz in September, and the company has since been shopping itself to potential buyers such as private equity firms. Such firms could take Yahoo off the public markets and try to turn around its business. Yahoo hasn't been able to increase revenue even as the Internet ad market grows by more than 20% annually.

Google is interested in selling some advertising across Yahoo's websites--something Yahoo largely does on its own today--according to people familiar with the matter.

Any deal involving Google could also bring other opportunities, such as bring Google's social networking service Google+ to Yahoo's audience of nearly 700 million unique visitors a month, these people said.

Yahoo also has relationships with many "premium" content publishers such as ABC News, which provides video and other content for Yahoo sites and for which Yahoo currently sells ads. Google is interested in having deeper business relationships with such publishers, one of these people said.

Google's interest in participating in the Yahoo sale discussions could also be partly an attempt to bid up prices to make matters more difficult for competitors such as Microsoft, said a person familiar with the matter. Such a tactic is standard competitive practice.

Google wants to help sell the ad space across Yahoo sites as Yahoo has struggled to get good prices for it, people familiar with the matter said. Yahoo's display-ad business—which includes graphical, interactive and video ads—is a $2 billion annual business.

Yahoo has faced challenges in selling display ads due to competition from social network Facebook Inc., video site Hulu LLC and others. Yahoo generates more than 30% of its display-ad revenue by selling lower-priced display ads for less-desirable real estate on its sites through its automated exchange, called Right Media, which matches buyers and sellers of ads.

Google has its DoubleClick ad exchange, which is attracting a growing number of advertisers and websites at the expense of Right Media. Industry experts said Yahoo's ad space is "undermonetized," meaning it could generate more money if Yahoo invested more in its technology or potentially placed the inventory on DoubleClick, among other things.

Google executives in the past have talked to Yahoo about such a partnership, said people familiar with the matter.

For now, Yahoo is trying to put together a partnership with Microsoft, AOL Inc., and other publishers of online content to pool ad space together into one marketplace to challenge DoubleClick, people familiar with the matter have said. It's unclear whether the partnership will come to fruition, or how long it would take to complete.

Google has long been the No. 1 player in Web search. But in the display-ad market, Google is a smaller--but growing--player. In the U.S., Facebook is expected to generate more than $2 billion in net revenue from display advertising this year, with Yahoo generating $1.6 billion and Google generating $1.1 billion, according to eMarketer