Ménage a Yahoo

Ballmer hasn't been twiddling his thumbs, either. He has reached out to News Corp., according to industry sources familiar with the companies.

Although Yahoo has staunchly asserted it is worth more than the $31 a share cash-and-stock offer made by Microsoft, Ballmer has been reluctant to sweeten the deal. Paying more than $40 billion for Yahoo would already send Microsoft to the credit markets to borrow money. Crafting a deal with News Corp. could lighten that financial burden as well as add the nice touch of a vibrant social-networking site, namely MySpace. In February, Murdoch asserted he wasn't interested in acquiring Yahoo But he didn't rule out partnering with Microsoft. Spokespeople for the companies declined to comment.

None of this was quite what Ballmer expected would unfold when Microsoft launched its bid for Yahoo on Feb. 1. Ballmer had hoped to quickly lock down a deal with a company that seemed adrift. However, he didn't seem to factor in the fierce antagonism that Microsoft still sparks in Silicon Valley, particularly among industry veterans including Yang and Google's chief executive, Eric Schmidt.

Microsoft executives consulted with former Hewlett-Packard executives who had led the integration of HP and Compaq for advice on how to orchestrate a clean deal. Start talking right away with managers, counseled the HP veterans. The countdown to carrying out a smooth merger starts from the time the deal is announced—not just from the time it is formally approved.

But Yahoo executives had little interest in taking part in any kind of pre-merger discussions with Microsoft. Instead, they launched wide-ranging conversations with possible white knights who could keep the company out of Microsoft's grasp. Yahoo also adopted measures aimed at making a hostile takeover expensive, including promising executives two years' severance if they left Yahoo "with good reason" within two years following an acquisition.

Microsoft and Yahoo managers have met at least twice since February. Ballmer has described the talks as "limited" and "not substantial." Yahoo!'s Jerry Yang and Chairman Roy Bostock, in a retort Monday, said the conversations were "constructive" on topics "including integration and regulatory issues." But maybe Yahoo executives were simply listening for clues about how to skirt antitrust hurdles if they chose to work with Google instead of the Redmondsoftware giant.

The trial advertising relationship announced Wednesday signaled that Yahoo and Google could be close to finalizing such a relationship.

Here's how it is likely to work: Over the next two weeks, Web surfers based in the U.S. who plug a search term into Yahoo!'s search engine will, as they always do, see a series of ads running alongside those search results. The overwhelming majority of those ads will still be served up by Yahoo!'s in-house system. But "no more than 3%" of the advertisements will be generated by Google's AdSense for Search service.