Bloomberg.com: U.S.

May 19 (Bloomberg) -- Microsoft Corp., the software maker that scrapped a $47.5 billion bid for Yahoo! Inc. this month, may forge a partnership with the Internet company on search advertising to challenge Google Inc.

Microsoft, which abandoned its takeover attempts May 3, said yesterday that it's exploring a transaction with Yahoo and may renew attempts to buy the entire company. The two may combine units that sell ads that run next to Internet search results, said Morningstar Inc. analyst Toan Tran.

Billionaire investor Carl Icahn is pressuring Yahoo to ally itself with Microsoft to compete with Google, which dominates the Internet search market. Icahn, backed by investors such as hedge- fund manager John Paulson, threatened last week to oust Yahoo's board if Chief Executive Officer Jerry Yang failed to sell to Microsoft.

``Carl Icahn is in this to make a quick buck, so whatever helps him make money he'll be happy with,'' said Tran, who is based in Chicago and doesn't own shares of either company. ``What Carl Icahn definitely wants is an outright sale of Yahoo to Microsoft at some price higher than what it is now.''

Microsoft, based in Redmond, Washington, fell 37 cents to $29.62 at 12:17 p.m. New York time in Nasdaq Stock Market trading. Sunnyvale, California-based Yahoo climbed 27 cents to $27.93, while Google advanced $4.60 to $584.67.

The new talks may bring Microsoft closer to a full acquisition of Yahoo, said Mark May, an analyst at Needham & Co. in New York. Today, he changed his recommendation on Yahoo's stock to buy. He had advised clients to hold on to the shares since April 2007.

Better Position

``Microsoft sees an opportunity where their negotiating position has improved,'' May said. ``They clearly have some very large shareholders on their side now and they realize that they can make some moves.''

Icahn, 72, owns 10 million shares and options to purchase 49 million more. He proposed a slate of board nominees last week including Dallas Mavericks owner Mark Cuban and former Viacom Inc. CEO Frank Biondi Jr. Icahn didn't return phone messages today.

Paulson said last week he would back Icahn's slate and that he was disappointed Yahoo didn't reach a deal with Microsoft. Paulson & Co. owned 50 million shares of Yahoo as of March. All 10 of Yahoo's directors are up for re-election at the annual meeting July 3.

Yahoo spokeswoman Tracy Schmaler and Microsoft representative Frank Shaw didn't respond to requests for comment today. Google spokesman Matt Furman declined to comment.

Both Yahoo and Microsoft trail Mountain View, California- based Google in Internet search traffic. Together they account for about a third of total Internet searches in the U.S., or about half the share Google has, according to researcher ComScore Inc.

Microsoft's Options

The companies have several options to work together, said analysts including Tran, May and Jefferies & Co.'s Youssef Squali in New York. Yahoo may allow Microsoft to sell some of the ads that accompany Internet searches, with both sharing in the revenue. One company could sell its Internet search unit to the other, or the companies could unite them in a joint venture, the analysts said.

Microsoft will eventually have to buy all of Yahoo if it wants to compete with Google, said Gene Munster, an analyst at Piper Jaffray & Co. in Minneapolis. By July, Microsoft will reach an agreement to buy Yahoo, either with Yahoo's current board or with Icahn's replacements, he said.

``It's going to happen just because it has to happen,'' said Munster, who has a neutral rating on Yahoo shares. ``Microsoft needs it too much.''

Internet Operations

Microsoft is investing more in Europe and pursuing smaller acquisitions, Kevin Johnson, president of the Internet business, said yesterday in a memo to employees.

``The fact is that we are not where we want to be in this business yet and we've been in this position longer than we'd all like,'' Johnson said.

Since Microsoft's initial offer on Feb. 1, Yahoo CEO Jerry Yang has tried to prove to investors his company can successfully compete without help from Microsoft, the world's biggest software maker.

Yahoo said in April that it would use Google's technology for placing advertisements next to relevant search results on a trial basis. Google made as much as 70 percent more in sales from each query at the end of last year, Yahoo has said.

People familiar with the talks said this month that Google and Yahoo are still examining a partnership. Coming to a similar deal with Microsoft may help Yahoo win approval from regulators for a partnership with Google, since Yahoo's search engine would also strengthen Microsoft's position in the market, Squali said.

``For Yahoo's board and management, it gets Microsoft off of their back and keeps the company independent,'' Squali said in a report today.

To contact the reporter on this story: Amy Thomson in New York at Athomson6@bloomberg.net

Bloomberg.com: U.S.

Blogged with the Flock Browser