As you no doubt know already, there have been three new twists in the story in the last 24 hours. One, Yahoo has cut a deal to test the outsourcing of search advertising to Google (GOOG). Two, there are reports that Yahoo is close to a deal to buy AOL from Time Warner (TWX). And three, Microsoft (MSFT) is supposedly in talks with News Corp. (NWS) on a three-way deal which would combined MSN, Yahoo and MySpace.

The Street has pushed up Yahoo’s share price here, largely on the theory that Yahoo’s strategic moves with AOL and Google could force Microsoft to raise its current offer of $31 a share in cash and stock. If nothing else, all the maneuvering shows that Yahoo is a valuable property, if one that has been chronically mismanaged. The prevailing view seems to be that the contemplated transaction with AOL would be less appealing to investors than simply selling to Microsoft; but it does suggest Yahoo may have more wiggle room than previously thought.

The Street also has been crunching the numbers on the financial boost to Yahoo from completely outsourcing search advertising to Google, and it has come up with eye-opening results. That said, there remain serious questions about whether such a deal, which would give Google effective control of well north of 80% of the domestic search market, could ever pass muster with anti-trust regulators.

Many analysts say they still see Microsoft winning, but at a higher price.

  • Heather Bellini, UBS: “Reaching a mutual agreement with Microsoft would be the best way for Yahoo to potentially extract a higher Microsoft bid,” potentially $32-$35 a share.
  • Rob Sanderson, American Technology Research: He says a successful test with Google could “push MSFT to raises its bid by a nominal amount.”
  • Mark Mahaney, Citigroup: “This will increase pressure on MSFT to increase its $31 offer price.” His price target is $34.
  • Youssef Squali, Jefferies: Views the potential agreements with AOL and Google as “hairy,” but says they “eventually force a MSFT bid raise.”

Estimates on the value to Yahoo of outsourcing search advertising to Google are eye-opening, but varied.

  • Brian Pitz and Brian Fitzgerald, Bank of America: They sees $550 million to $560 million in incremental EBITDA for ‘09, offset by loss of $380 million in affiliate search revenue. They also see $500 million to $600 million in operating cost savings.
  • Mark Mahaney, Citigroup: Sees “over $1 billion in accretive cash flow” from full search outsourcing deal.
  • Douglas Anmuth, Lehman: Sees ‘08 boost from outsourcing search of $300 million to revenues and $600 million to EBITDA.
  • Youssef Squali, Jefferies: Sees ‘09 boost of $800 million to $900 million in revenue, $650 million to $750 million in EBITDA.
  • Rob Sanderson, AmTech: Sees 35% boost to total company EBITDA.

A few other related tidbits.

  • Bank of America’s Pitz and Fitzgerald note that “with nearly 90%” of the combined search ad market, an outsourcing deal “may come under regulatory scrutiny.” Yeah, I’ll say.
  • Clayton Moran, of Stanford Group, contends the overall winner here is Google. Anything that delays a Microsoft/Yahoo combination works in Google’s favor.
  • Citigroup’s Mahaney says that a full Yahoo outsourcing deal to Google would be the worst case scenario for Microsoft.
  • AmTech’s Sanderson says an outsourcing deal could boost Google’s earnings 10%.
  • Rich Greenfield, of Pali Research, says MSFT has the balance sheet to bid “virtually any price” for Yahoo, and says he can’t imagine them losing out to a deal with AOL. He also says that in a Microsoft/Yahoo/MySpace scenario, AOL ends up the biggest loser with no obvious partners left.

Yahoo today is up 78 cents, or 2.8%, to $28.55.