We have witnessed a dynamic week rich in events revolving around Yahoo’s future. The beginning was set on April 5th when the software giant Microsoft sent to Yahoo!’s board of directors a hostile letter. In it Microsoft urged Yahoo! to accept its $41 billion buyout offer within the next three weeks. Otherwise the software maker threatened with a hostile takeover at a less attractive price.

“If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo! board”, wrote Microsoft Chief Executive Steve Ballmer.

"If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal," he further wrote.

On Monday, Yahoo! wrote back that the company didn’t oppose to a transaction with Microsoft but the offered price should fully reflect the value of Yahoo!, including any strategic benefits to Microsoft."

Then, Yahoo made explicit signs for its decisiveness to explore all strategic options. But how much successful could be Yahoo! in its efforts to establish more favorable alliance in the current situation?

On one hand, Yahoo! and Time Warner’s AOL are negotiating to combine their Internet operation. The AOL-Yahoo deal would include the repurchase of some Yahoo shares at a price above Microsoft’s offer.

On the other hand, on Wednesday Yahoo announced an agreement with Google for conducting a test of Google AdSense for Search service. But is it possible Yahoo’s test to grow into an advertising pact with Google? This option could give Yahoo another alternative to the Microsoft takeover. Or at least to give Yahoo more reasons to hold its ground for a higher price from Microsoft.

"Yahoo will be testing Google's AdSense for Search service, which will deliver relevant ads alongside Yahoo's own natural search results," said Google in a statement. "This is only a limited test and does not necessarily mean that Yahoo will join the AdSense program."

Yahoo said the test would continue two weeks and would involve no more than 3% of Yahoo's Web search queries. It is designed to evaluate the revenue potential of a broader search ad sales outsourcing arrangement. Analysts predict that outsourcing its search ads to Google would boost Yahoo's cash flow.

The software giant took an immediate stand.

"Any definitive agreement between Yahoo and Google would consolidate over 90% of the search advertising market in Google's hands," said Microsoft in a statement. "This would make the market far less competitive."

Microsoft also added, "Our proposal remains the only alternative put forward that offers Yahoo shareholders full and fair value for their shares."

At the same time, Microsoft and News Corporation are negotiating to consolidate their forces in a joint bid for Yahoo. If they managed to acquire Yahoo, this three-way alliance would create a huge one-stop shop for online advertisers and bring together some of the largest players in the social networking, online news and email, according to The Wall Street Journal.

Analysts also anticipate Yahoo to eventually lose this battle. As Yahoo! considers to be undervalued by Microsoft, the company is now struggling to either reject the current offer which it will most probably have to finally accept or is just trying to boost it. The denouement is yet to come.

Copyright © 2008 DevStart, Inc. Permission is required to use the material on this page.