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A joint Microsoft-News Corp bid could create a more formidable competitor to Google by uniting three of the biggest Web site publishers: Yahoo, Microsoft's MSN and News Corp's MySpace social network.
Bellini noted that while a tie-up could make sense by lowering Microsoft's financial risk, there would be an increased risk over integration.
Google is seen out of the running for buying Yahoo outright, due to antitrust concerns. However, Yahoo's two-week test of Google's search advertising technology could lead to a broader deal.
Citigroup analysts Mark Mahaney and Brent Thill estimated a full search outsourcing deal could generate more than $1 billion in cash flow to Yahoo, though they also say a Microsoft deal is the "most likely outcome."
Antitrust lawyer Evan Stewart, of Zuckerman Spaeder LLP, said a tie-up between Google and Yahoo would raise eyebrows, even if the deal was not a formal merger.
He called the U.S. Justice Department an 800-pound gorilla with the power to investigate any deal it found troubling. "If Yahoo were to be swallowed up by Google, even a sleeping 800-pound gorilla would wake up to that," Stewart said.
Any of the potential mergers would fundamentally change business on the Web as growth slows dramatically after an explosive decade. Talks with News Corp, which earlier had discussed working with Yahoo as a counter to Microsoft, are at a sensitive stage, The New York Times said. The Wall Street Journal called those talks "serious."
News Corp shares edged down 0.3 percent to $18.89, and Time Warner shares rose 1.3 percent to $14.61. Google rose more than 1 percent to $469.08.
Microsoft, News Corp, Time Warner, Google and Yahoo have all declined to comment on the talks.