The senior management of Google was meeting to discuss the search group's response to Microsoft's latest approach to Yahoo as it emerged the software company had made a firm proposal to Yahoo that goes beyond a simple partnership on search advertising
Eric Schmidt, chairman and chief executive, made clear that Google remained opposed to a MicrosoftYahoo deal, as the company's co-founders said the "horse race" between the three was unhealthy for the development of the internet.
"If we're focused on what the other companies are doing we won't make much progress," co-founder Larry Page said at Google's zeitgeist meeting of customers, politicians and technologists in Hertfordshire, north of London.
"I think if we're talking [about] Microsoft and vice versa that wouldn't be good for the market. It also wouldn't be good for a company," Mr Page argued as Sergey Brin, his co-founder, said Google must instead continue to "re-invent itself".
Mr Schmidt said Google was "very excited" about a trial of a search advertising partnership with Yahoo, but would not comment further on its own discussions with Yahoo. Given Google's more effective advertising system, which produces more revenue from each search, Microsoft would have difficulty convincing Yahoo to do a deal with the software company instead.
Microsoft's new proposal was made late last week after activist investor Carl Icahn started a fight to replace Yahoo's board of directors, said one person familiar with the situation.
If Microsoft were to attempt a full acquisition of Yahoo's search business it would involve a sizeable transaction in its own right.
According to Sandeep Aggarwal, an analyst at Collins Stewart, Yahoo's search operations are worth $21bn, while its display and communications properties are worth $14bn and its investments in Asian partners could yield $9.25bn.
While Microsoft's proposal does not include an acquisition of all of Yahoo, statements made by each side would allow for discussions to develop in other directions without either side having to make additional disclosures, said the person familiar with the situation.
Microsoft's return to the fray reflects the pressure on it to find a response to Google, as well as the new pressure on Yahoo from Mr Icahn's proxy fight.
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