Now Microsoft Wants to Partner with Yahoo on Searches

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A boardroom showdown between Yahoo directors and billionaire investor Carl Icahn may turn out to be irrelevant if Microsoft's latest move succeeds. That could see Microsoft and Yahoo join forces against Google.

Microsoft walked away from its $47.5 billion bid to acquire Yahoo two weeks ago. But on Sunday, Microsoft proposed a new deal to Yahoo. Instead of outright acquiring Yahoo, Redmond has proposed alternatives to improve its online services and advertising by partnering with the search giant.

Microsoft confirmed it is not proposing a new bid to acquire Yahoo, though is reserving the right to consider that alternative pending future developments and discussions with Yahoo, its shareholders or other third parties.

"Microsoft is considering and has raised with Yahoo an alternative that would involve a transaction with Yahoo, but not an acquisition of all of Yahoo," Microsoft said. "There of course can be no assurance that any transaction will result from these discussions."

A Vague Twist in the Microhoo Drama

Yahoo promptly responded to Microsoft, issuing a statement of its own and confirming that acquisition talks are off the table -- at least for now.

"Yahoo and its board of directors continue to consider a number of value-maximizing strategic alternatives for Yahoo, and we remain open to pursuing any transaction which is in the best interest of our stockholders," the company said. "Yahoo's board of directors will evaluate each of our alternatives, including any Microsoft proposal, consistent with its fiduciary duties, with a focus on maximizing stockholder value."

Greg Sterling, principal analyst with Sterling Market Intelligence, admitted he was a little surprised at the latest development in the Microhoo soap opera. The latest spin demonstrates that Microsoft still thinks it needs Yahoo, Sterling said, or at least its search share.

"Microsoft's statement is fairly vague and Yahoo's response was relatively bland in reaction. We can confidently speculate that some search-related transaction is what Microsoft is after, but the precise scope or form of it is unclear at this point," Sterling said. "There could also be some sort of joint venture being contemplated."

Avoiding a Proxy Fight

The New York Times reported the possibility of a joint venture between Microsoft and Yahoo on Sunday, although Yahoo has been making moves to partner with Google. Yahoo is likely to explore all its options in the wake of a proxy battle launched by Icahn last week.

Icahn sent a letter to Yahoo Chairman Roy Bostock explaining that angry Yahoo shareholders have implored him to replace Yahoo's board with 10 new directors at the company's July 3 meeting. The objective is to restart acquisition talks between Microsoft and Yahoo.

Icahn said he has purchased approximately 59 million Yahoo shares and share-equivalents. He has also sought antitrust clearance from the Federal Trade Commission to acquire up to about $2.5 billion worth of Yahoo stock.

Icahn ended his letter with a sincere hope that Yahoo will heed the wishes of its shareholders and "move expeditiously" to negotiate a merger with Microsoft, thereby making a proxy fight unnecessary. A joint venture between Microsoft and Yahoo might end it long before July 3.