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By Andrew Ross Sorkin
New York Times News Service / May 19, 2008

Microsoft has proposed a complex new deal with Yahoo that would involve collaboration between their online advertising businesses but would not involve a full takeover, Microsoft said yesterday.
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Microsoft released a brief statement disclosing the renewed talks, a surprising reversal just weeks after it withdrew its $47.5 billion takeover bid for Yahoo and said it had "moved on." The statement hints that Microsoft may later seek to reenter merger negotiations.

Microsoft said it was "considering and has raised with Yahoo an alternative that would involve a transaction with Yahoo but not an acquisition of all of Yahoo." Microsoft provided no additional details.

People involved in the confidential discussions said the talks center on a partnership or joint venture for search-related advertising to compete against Google.

When Microsoft made its unsolicited bid of $31 a share for Yahoo in February, it said it was doing so as part of its battle to increase its relatively small slice of the search-related advertising market against Google, a behemoth with more than 58 percent of the market.

The timing of Microsoft's new approach may seem opportunistic. Yahoo has been racing to complete its own partnership with Google and was expected to announce a formal agreement as early as this week. A Yahoo-Google partnership, which is likely to face antitrust scrutiny, could make Yahoo a less desirable partner or takeover candidate for Microsoft.

The new discussions also come as Yahoo is facing increasing pressure from shareholders, some of whom are furious that its board did not work harder to reach a deal to sell the company to Microsoft.

Last week, Carl C. Icahn, the activist investor, mounted a proxy contest to replace Yahoo's entire board, saying the directors had "acted irrationally and lost the faith of shareholders."

He is hoping to push Microsoft and Yahoo back to the negotiating table to reach a full-scale takeover. People close to Microsoft and Icahn say neither has been in contact with the other.

It is unclear whether Microsoft would pursue a takeover bid again.

In its statement, Microsoft insisted it was not making a bid, but hinted that it could be persuaded to reverse course.

"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 company said.

A spokesman for Yahoo declined to comment.