Microsoft, Yahoo in talks on possible deal

— -- Microsoft's pursuit of Yahoo is far from finished.

Two weeks after withdrawing a $47.5 billion offer to buy the Internet icon, Microsoft MSFT said Sunday that it and Yahoo are discussing a transaction but not an acquisition of all of Yahoo YHOO.

Microsoft did not provide any details. Yahoo issued a statement late Sunday saying it was considering a "number of value-maximizing strategic alternatives" and would evaluate any Microsoft proposal.

Despite its earlier insistence that its pursuit of Yahoo was finished, Microsoft's statement Sunday also left open the possibility of a full acquisition.

"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, its shareholders or with other third parties, Microsoft said.

Yahoo and Microsoft reinitiated talks after billionaire investor Carl Icahn last week launched a plan to boot Yahoo's 10-member board of directors for "irresponsible" and "unconscionable" acts that prompted Microsoft to drop its $33-a-share bid to buy Yahoo.

Microsoft's last offer was worth $2 a share more than its initial bid, but Yahoo had demanded $37 a share.

Yahoo shares closed Friday at $27.66, down $1, or 3%, from where they were when Microsoft withdrew its offer.

According to a source close to Microsoft, the renewed talks would involve a partnership of some kind.

The source asked not to be named because Microsoft has not authorized others to speak publicly on its behalf.

The most likely scenario, industry analysts say, would be an advertising accord in place of a similar arrangement that Yahoo and Google are now discussing.

The Yahoo-Google talks have struck a sour note with some Yahoo followers because a deal with Google — dominant in the online advertising market — would face antitrust hurdles and would put Yahoo at a financial disadvantage, says Jonathan Yarmis, an analyst at AMR Research.

"Yahoo needs to placate everyone out to shoot them because they jilted Microsoft, and there will be blood in the streets if Yahoo pursues a deal with Google," Yarmis says.

"A deal with Microsoft — even a partnership — would provide Yahoo with a graceful exit from Google," he says.

The Microsoft source said the software giant had not talked to Icahn since he began his bid to replace the board. Icahn's office did not return phone calls Sunday.

Last week, several prominent Yahoo investors let their displeasure be known following Yahoo's persistent refusal to accept Microsoft's overtures, which were first announced on Feb. 1.

Paulson & Co., a $30 billion hedge fund that has quickly amassed 50 million shares of Yahoo, said it hopes Yahoo and Microsoft work out a deal in lieu of Icahn's threat to lead a proxy fight to replace Yahoo's board with his own slate of directors at Yahoo's July 3 shareholders meeting.

Ryan Jacob, a longtime Yahoo shareholder, said Icahn's bid was a positive move to bring shareholder value to Yahoo, which has struggled to compete with Google for online revenue.

He supported a new board "amenable" to doing a deal with Microsoft.