The behind-the-scenes wrangling in the Microsoft/Yahoo takeover saga began in earnest yesterday as both parties initiated moves to bolster their respective positions.

Yahoo, well aware that a hostile takeover bid looms after the "Ballmer Letter" of the weekend, firstly announced it is to run Google search ads alongside some of its own search results – up to 3% of its search queries over a two-week period. The aim of this, analysts say, is to evaluate a more extensive agreement between the two around Yahoo outsourcing its search advertising to Google – a move which could significantly boost its profitability and, thus, its share price. One analyst estimates that such a move could see Yahoo's shares reaching between $39 and $45 – much too rich even for Microsoft.
Then last night, The Wall Street Journal reported that Time Warner was considering folding its AOL subsidiary into Yahoo and providing Yahoo with cash – for 20% of the combined company – to buy back its own shares. This deal, reports say, would be valued at about $10-billion and would exclude AOL's dial-up Internet access business.
On the other side of the battlefield, Microsoft – obviously aware that it may have to raise its initial offer to Yahoo of $42-billion – is reported to be contemplating a joint-bid with Rupert Murdoch's News Corp. The New York Times says that although talks are only preliminary, such as deal could create one of the world's biggest Internet companies combining Yahoo, Microsoft's MSN and News Corp.'s Web properties such as MySpace and Fox Interactive.
Meanwhile, it seems Ballmer's strongly-worded ultimatum at the weekend could backfire on him.
According to The Wall Street Journal, at least one major Yahoo shareholder – Legg Mason – is prepared to back Yahoo's effort to stay independent if Microsoft lowers its takeover offer.
Legg Mason portfolio manager, Bill Miller, told the Journal: "The problem is Microsoft blundered with the letter this weekend. Telling the shareholders you're going to take something away from them is not a way to get their support."
Miller was, however, pragmatic about the deal saying he believes Microsoft will eventually pay what it takes to own Yahoo, dismissing the notion that Yahoo could find an alternative that shareholders would like.