Microsoft and Yahoo re-enter talks

Microsoft announced Sunday afternoon it has issued another proposal to Yahoo that calls for a transaction with Yahoo, but that would not involve the acquisition of all of Yahoo's assets.

The announcement comes just days after billionaire investor Carl Icahn launched a proxy fight to unseat Yahoo's current board at the Internet search pioneer's upcoming July 3 annual shareholders meeting.

Icahn, a large Yahoo stakeholder, aimed to pressure the search company to restart talks with Microsoft, after the software giant withdrew its unsolicited buyout bid of $33 a share on May 3.

While Microsoft has repeatedly said it has "moved on" after withdrawing its Yahoo bid, the software giant still faced the issue of how it would bolster its Internet business to compete against its archrival Google. And Yahoo--which, sources told News.com, considered the ball to be in Microsoft's court since it was the one to walk away from the deal--faced the ire of its major shareholders after those deal talks failed.

"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 in a statement.

"Microsoft is not proposing to make a new bid to acquire all of Yahoo at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo or discussions with shareholders of Yahoo or Microsoft or with other third parties," the software giant stated.

There is no guarantee, Microsoft was careful to say, that anything may come from these discussions. The company declined to comment beyond what it issued in its statement, a Microsoft spokesman said.

The Google factor
But according to reports in the New York Times and Wall Street Journal, Microsoft proposed an arrangement in which Microsoft would sell advertisements that would be displayed next to Yahoo search results, in an effort to fight back competition from Google.

Yahoo, meanwhile, kept a poker face in issuing its response to Microsoft's Sunday announcement.

"Yahoo has confirmed with Microsoft that it is not interested in pursuing an acquisition of all of Yahoo at this time. 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," Yahoo said in a statement.

The Internet search pioneer added: "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."

The timing of Microsoft's proposal comes as Yahoo is gearing up to announce a transaction with Google, as early as next week, which calls for Yahoo to use Google search ads.

Such a deal has weighed heavily on Microsoft, which stated it when it withdrew its buyout bid that it would forgo a hostile bid for Yahoo in hopes it would not prompt the Internet search pioneer to go running into the arms of Google.

One scenario worth keeping an eye on is whether Yahoo moves forward with its Google partnership. If Yahoo hooks up with Google, Microsoft at that point may consider it has nothing to lose by bolstering Icahn's proxy fight by making a new bid and taking it directly to Yahoo shareholders. That move would give Icahn's proxy fight real teeth, in that investors know that if they vote for Icahn's slate, they would in essence be voting for a merger of the companies.

To reiterate Microsoft's statement Sunday: "Microsoft is not proposing to make a new bid to acquire all of Yahoo at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo."

Eye on Icahn
Despite these recent developments in resuming talks between the companies, Icahn and Microsoft have had no contact, according to people familiar with the talks.

Icahn, according to a Reuters report, may find anything less than an outright buyout not acceptable.

"He does not want to see Yahoo pushed into some joint venture with Microsoft and is not going to be used to push Yahoo into it," according to Reuters, which cited a source familiar with Icahn's thinking. "The best thing for Yahoo shareholders is for Microsoft to buy Yahoo...If not, Icahn would ally with Yahoo in doing a deal with Google over Microsoft."

If Microsoft and Yahoo strike a deal, Microsoft would most likely be interested in Yahoo's search and advertising offerings, given that is where the Redmond giant has struggled to take the lead.

In addressing the software giant's statement regarding Yahoo and its future plans, Kevin Johnson, Windows and Windows Live chief, said Sunday in a letter to employees:

Regardless of the outcome of any new discussions, it is important that we continue to move forward to strengthen our online services business. 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. To that end, we will be accelerating elements of our core strategy, and breaking ground in new areas."

Microsoft's search strategy, as previously reported by News.com's Ina Fried, will be unveiled Wednesday during its annual advertising conference, advance 08. That strategy includes expanding its capabilities in new types of vertical search and improvements in overall relevance of search queries. For example, Microsoft will beef up its shopping-specific search tools and is making improvements to its algorithmic search.