Microsoft mulls media options, no new talks: source

By Eric Auchard and Kenneth Li

SAN FRANCISCO/NEW YORK (Reuters) - Microsoft Corp has had no new negotiations on deals involving Yahoo Inc, but preliminary talks with media companies continue, a source familiar with the software giant's thinking said on Wednesday.

The media companies have included Time Warner Inc, which owns AOL, and News Corp, parent of MySpace, the source said.

Shares of Yahoo jumped as much as 9 percent earlier in the day, after the Wall Street Journal reported that Microsoft, positioning for a new run for Yahoo's search business, had in recent days approached media companies to join together on a deal that would effectively lead to Yahoo's breakup.

However, the Reuters source and a CNBC report, citing unnamed sources, later said there were no new talks or negotiations.

The Journal also reported Microsoft had met with activist investor Carl Icahn in recent days to encourage him to press his proxy battle for control of Yahoo's board, the first sign Microsoft welcomed his month-old campaign. This development also was attributed to unnamed sources familiar with the talks.

Icahn was not available to comment on the report.

Microsoft, Yahoo, Time Warner and News Corp all declined comment.

REVIVING HOPE

Wall Street analysts said the latest news revived flagging hopes among some investors that Microsoft was still interested in doing a deal with Yahoo. "The hopes that Microsoft would come back were getting crushed over the last 10 trading days," Collins Stewart analyst Sandeep Aggarwal said.

Yahoo stock ended the day up 3.4 percent at $20.88. The stock had traded as low as $19.58 on Tuesday, near its level in late January before Microsoft made its unsolicited takeover bid for Yahoo, sending the stock above $30 in mid-February.

Microsoft shares fell 3.7 percent to $25.88 on Wednesday. In the prior day's trading, Microsoft fell to two-year lows of $23.19, intraday, before recovering.

Analyst Youssef Squali of Jefferies & Co said the sharp Yahoo stock reaction was most likely a defensive move by short-sellers seeking to cover bets a Microsoft deal was off.

"Even the rumor that Microsoft is getting interested again is enough to have people to want to cover their bets against Yahoo stock," Squali said, adding that many investors have shorted Yahoo from the high $20s all the way down below $20.

Options investors placed fresh bets that Yahoo would be trading up to $27.50 by October, analyst Rebecca Engmann Darst of Interactive Brokers Group said.

THE WAITING GAME