Yahoo reportedly closer to Google search deal

As Yahoo awaits Microsoft's decision on whether to launch a proxy war, the company is moving closer to a search deal with Google.

Yahoo and Microsoft, which are negotiating through the Wall Street Journal, are trying to outflank each other. Microsoft is talking about walking away and Yahoo is using Google for additional leverage and to play defense. The Journal reports:

Yahoo was waiting for Microsoft to announce its approach this week after the two sides failed to reach a negotiated deal, amid a divide on price. But Yahoo has also been pursuing a broad agreement to carry search ads from Google, which it views as a way to boost its cash flow and bolster its claim to shareholders that it's worth more than Microsoft has offered. Such an agreement could still go forward even if Microsoft announced a hostile takeover effort.

While a broad search ad pact would likely attract intense antitrust scrutiny, the options Google and Yahoo are discussing include a nonexclusive arrangement that they believe could satisfy regulators, say the people familiar with the matter.

Where things really get interesting is that this Yahoo-Google tie-up could create a real-time auction system that could allow Microsoft to connect. This system would reportedly ease regulator concerns. Yahoo and Google have been running a test of their partnership. It's no coincidence that Yahoo fed the Journal its progress report on Google on the same day Microsoft CEO Steve Ballmer noted he could walk away from the deal.