Yahoo Attracts More Potential Suitors

The swirl of potential deal activity around Yahoo Inc. is growing.

Google Inc. has talked to at least two private-equity firms about potentially helping them finance a deal to buy Yahoo'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, the person said.

Google might end up not pursuing a bid, the person added. It is unclear which private-equity firms the Internet search company has talked to.

The discussions between Google and private-equity firms are the latest indications of growing deal activity around Yahoo. Yahoo's board fired Chief Executive Carol Bartz in September, and the company since has been shopping itself to potential buyers such as private-equity firms. Yahoo hasn't been able to increase revenue even as the Internet ad market expands by more than 20% annually.

Jack Ma, CEO of Alibaba Group Holding Ltd., the China-based Internet company in which Yahoo owns a roughly 40% stake, recently said he was interested in buying Yahoo, but it was unclear whether he has made a serious move to do so.

Any deal tying Google and Yahoo, which are two of the world's biggest Internet companies, would be sure to attract antitrust scrutiny. In 2008, federal antitrust lawyers in the U.S. 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 a potential joint bid for Yahoo by extending loans to its deal partners and buying preferred stock in Yahoo, said people familiar with the matter. The deal's structure would reflect Microsoft's desire to limit its risk.

The software company has been in discussions about a potential joint proposal for Yahoo with private-equity firm Silver Lake Partners and the Canada Pension Plan Investment Board, people familiar with the matter have said. Microsoft's contribution would likely be several billion dollars, although the exact amount hasn't been decided, the people said.

Owning a chunk of preferred stock in Yahoo would allow Microsoft to recoup its investment before owners of common stock and some other types of investors. Similarly, lending to the new owners at a high interest rate would help Microsoft make a return on its investment even if upside on the deal proved limited, the people said.

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 also could yield other opportunities, such as bringing Google's social-networking service Google+ to Yahoo's audience of nearly 700 million unique visitors a month, the people said.

Yahoo also has relationships with many so-called 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 talks also could be partly an attempt to bid up prices and make matters more difficult for competitors such as Microsoft, said a person familiar with the matter.

Google wants to help sell the ad space across Yahoo sites because 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 amid 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, Right Media, which matches buyers and sellers of ads.

Google has its DoubleClick ad exchange, which many industry experts say is a more efficient technology that is likely to help with pricing. DoubleClick is attracting a growing number of advertisers and websites at the expense of Right Media.

Industry experts say 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, people familiar with the matter said.

Yahoo could also potentially place its ad inventory on other ad exchanges, a tactic it is using in markets outside the U.S., such as Europe, said a person familiar with the matter. Third-quarter revenue in Europe, which represents about 10% of Yahoo's total revenue, rose 14% year to year after payouts to business partners. By contrast, U.S. revenue fell 14% year over year after payouts.

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 is 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—competitor. 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 research firm eMarketer Inc.