Microsoft proposes alternative deal with Yahoo

Microsoft emphasized it was not proposing to make a new bid to buy all of Yahoo but could reconsider.

A source familiar with Microsoft8217;s thinking said Yahoo was responsive to Microsoft8217;s latest proposal but emphasized that discussions between the two companies might not result in a deal.

The New York Times reported that Microsoft and Yahoo may form a partnership or joint venture for search-related advertising to take on Google Inc, which dominates the search market with a share significantly larger than a combined Yahoo and Microsoft.

For its part, Yahoo continues to talk with Google Inc about a search advertising partnership and a deal could come as early as this week, a source familiar with the talks said on Thursday.

The statement from Microsoft comes on the heels of a proxy campaign launched on Thursday by Icahn to replace Yahoo8217;s board with directors who would reopen talks with Microsoft, saying Yahoo had acted irrationally in refusing the giant software company8217;s 47.5 billion bid.

Microsoft walked away from its pursuit of Yahoo two weeks ago after three months of negotiations when Yahoo8217;s board rejected Microsoft8217;s sweetened offer of 33 a share, saying the company was worth at least 37 a share.

Meanwhile, Microsoft and Icahn have not held discussions about Yahoo, said another source close to the company. A spokesman for Yahoo declined to comment and Icahn could not be reached for comment.

In a letter to Icahn last week, Yahoo board Chairman Roy Bostock said a new board would not be in the best interests of Yahoo investors, adding that Yahoo would consider any deal from any party, including Microsoft, if it offered the company full value.

Icahn, who has said he had accumulated 59 million shares and options in Yahoo, also has the support of Paulson 038; Co, a 30 billion hedge fund that has amassed a 3.4 percent stake in Yahoo, and other investors upset by the board8217;s handling of negotiations with Microsoft.

Microsoft had said it had moved on from Yahoo and remained committed to building an online advertising powerhouse to rival Google. Company executives had said in making a case for a Yahoo acquisition that buying the web company would be the fastest way to close the gap on Google.

In an e-mail to employees on Sunday, Kevin Johnson, president of Microsoft8217;s platform and services division, said the company must strengthen its online business regardless of how talks with Yahoo turn out.

8220;The fact is that we are not where we want to be in this business yet and we8217;ve been in this position longer than we8217;d all like,8221; Johnson wrote in the e-mail.

Kim Caughey, a senior analyst at Fort Pitt Capital Group, said the market will probably send Yahoo shares higher while pushing down Microsoft shares when the market opens on Monday.

Caughey said a joint venture or minority investment with Yahoo could cause confusion about who was in charge.

8220;Microsoft walking away from Yahoo was a total head fake,8221; said Caughey. 8220;Microsoft is a terrible poker player if it thought people were going to believe that the deal was dead.8221;