The Wall Street Journal uncovers Yahoo Inc.'s feverish behind-the-scenes activity intended to keep Yahoo shareholders from being swayed by Microsoft talking points. First that Yahoo is testing Google's Adsense for monetizing about 3% of its search queries, as a means of finding out the viability of a broader agreement for outsoursing search ads to Google. Second, that a Yahoo-AOL deal, which would include Time Warner letting AOL fold into Yahoo and offering the new combined entity a cash infusion, would enable Yahoo Inc. to initiate a massive repurchase of its own shares from the market at a premium, probably well over Microsoft's initial offer price of $31 per share.

Yahoo Inc. and Time Warner Inc.'s AOL are closing in on a deal to combine their Internet operations, a move that could thwart Microsoft Corp.'s effort to acquire Yahoo, people familiar with the matter said Wednesday. One person involved in the discussions cautioned that there was still "a lot of work to do" before a final agreement between AOL and Yahoo. Google already handles search advertising sales for AOL and owns a 5% AOL stake.

Before you start pegging Yahoo upwards, it might be prudent to take note of a few hiccups in the way of a possible 'Yahoo-AOL-Google' trinity.
As of March 2008, according to the Compete.com web search market share statistics, Google had 69.4%, Yahoo 14.8% and AOL 1.5%. If Google were to be providing ads for all three, the combined market share of visitors subjected to Google's Ads would be a whopping 85.7%, with Microsoft limping in a distant second at 10.2%. Out of the reamining 4 to 5%, Google again has a big share of the pie, because a lot of smaller search engines and portals already provide search results from Google. That means Google would end up with close to 90% of the search market. If you think Microsoft is ever going to let this happen, you badly need a crash course in anti-trust regulations and Microsoft's historical background. There isn't any company which knows more about anti-trust than Microsoft. Period.

Secondly, even if you ignore the anti-trust factor, Yahoo shareholders still might prefer to tango with Microsoft. As has been noted by Forbes, via John Paczkowski at All things Digital, 18 out of the top 25 biggest Yahoo shareholders hold bigger stakes in Microsoft than they do in Yahoo. For them, this is a one-way street. If the Yahoo bid goes sour, YHOO drops. If Microsoft is forced to increase its bid, they still lose, because it would bring down MSFT. The only way these 18 big shots win is if the deal is consummated as-is. Which very likely means that it will be, regardless of what anyone else thinks, wants or is doing.

Put another way, Jerry Yang is staring at a horse's head and bloody sheets. My previous recommendation still stands - YHOO keeps going down until Yahoo agrees to be bought by Microsoft. Yahoo Board is just playing for time, there's no other realistic choice, and the bid rate is not going up.

Update: Andrew Ross Sorkin and Miguel Helft, IHT, add a twist to the tale. Rupert Murdoch's News Corp. is in talks with Microsoft about joining in its contested bid for Yahoo, according to people involved in the discussions. Terms of the proposed union are still being worked out, these people said, and remain murky. News Corp. would probably contribute its Fox Interactive Media unit, which includes MySpace, and possibly cash to a partnership with Microsoft as part of an acquisition of Yahoo, they said.