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Google and Yahoo looking good?

Yahoo is inching closer to an ad search outsourcing deal with Google, after early returns of their two-week test show favorable results, according to a report in The Wall Street Journal.

Yahoo is closer to outsourcing its core ad search business to Google, after favorable testing of Google's advertisements on its search pages, according to a report in The Wall Street Journal.

The WSJ cited people familiar with the matter who said that a deal between Yahoo and Google is increasingly likely given the status of the testing. The report also notes that such an outsourcing deal could give Yahoo a boost in its efforts to spur Microsoft into increasing its unsolicited buyout bid for the Internet search pioneer.

Yahoo may need such help if Microsoft is concerned about the additional costs it may have to bear to retain Yahoo employees.

A report in the New York Times noted "the hidden cost of 'flight insurance' against employee defections may also be a reason Microsoft has resisted raising its bid."

The Times report, citing sources, noted Microsoft not only paid $800 million to acquire Tellme Networks but spent an additional $100 million on employee retention perks--or an average of $300,000 per employees for the 330-member workforce.

One potential take-away from the Wall Street Journal and New York Times stories is negotiations between Yahoo and Microsoft may be hitting a rough patch, after media reports surfaced last Friday suggesting the two companies may try negotiating again this week.

That reported truce arose following rapid-fire reports last week of potential additional buyers hovering nearby. The often-reported Time Warner-AOL suitor may find traction in teaming up with Google to enter into a Yahoo deal, while speculation surfaced that Microsoft and News Corp. are toying with the notion of potentially making a joint bid for Yahoo.

Last week, Yahoo announced it would begin a limited test of using Google to deliver some search advertising. Microsoft immediately came back with a stern warning that such a partnership would hurt competition.

And while the Journal report notes that some view a Yahoo-Google outsourcing agreement, beyond the two-week test, as "mere gamesmanship" given potential antitrust issues it could pose, it may, nonetheless, seem a valid alternative to those weighing their options at Yahoo.

The Internet search pioneer has run both a Microsoft buyout scenario and a Google outsourcing deal through its antitrust viewfinder, according to sources who spoke with CNET

Yahoo, meanwhile, has invested millions of dollars in its own search technology, called Panama, so a partnership with Google would be a serious departure from its previous efforts--though it would not necessarily mean that the Internet company is completely killing off its entire ad infrastructure.

And, in the Journal report, it cites sources as saying that even if Yahoo pursued an outsourcing partnership with Google, it would not necessarily nix a Microsoft deal. The report notes Yahoo, for example, could step away from its Google fling, should it hitch up with Microsoft.'s Desiree Everts contributed to this report.