MS to Yahoo: Never say never

Forget shock and awe. This is more like making a pain in the neck of yourself until the other side caves just to shut you up.

Microsoft's making another pass at Yahoo, but this time Steve Ballmer's not trying to go all the way with Jerry Yang. Instead, he says getting to first base will be enough.

"In light of developments since the withdrawal of the Microsoft proposal to acquire Yahoo Inc., Microsoft announced that it is continuing to explore and pursue its alternatives to improve and expand its online services and advertising business. 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 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."

(Also take a look at the text of this memo Kevin Johnson sent updating his team on Microsoft's search strategy.)

A few observations:

A) Microsoft must believe Yang's position is a lot weaker than it was when it ended negotiations about a possible acquisition. That's easy to understand considering the howling from Yahoo investors about losing out on a sure payday. Especially in light of Carl Icahn's decision last week to wage a proxy fight, Microsoft may be thinking that Yahoo's board would be more amenable to a partial buyout than it would to a 100 percent acquisition.

B) In order to believe the above, Microsoft must also think Yahoo's board is really desperate. Subtract whatever relevant Yahoo services would be covered in "online services and advertising" and what's going to be left? Flickr's great and millions use Yahoo Mail. A lot hinges on what Microsoft has in mind but Yahoo is going to be careful not to commit ritual hara-kiri by ripping out the guts of the company. Say what you want, but we're not talking about a collection of village idiots.

C) Of course, with shareholder suits and Icahn circling, Yahoo's board is under a lot of pressure. By offering to return to the negotiating table, Microsoft's offer may have the effect of preventing Yahoo from pursuing a rumored deal with Google for search ads. In the end, maybe Microsoft can secure a similar deal for itself--or even something more--with Yahoo. And that would leave the door open to further negotiations, especially as the proxy fight plays out. (Reuters is reporting Sunday that Microsoft has not yet held any discussions with Icahn.)