Microsoft proposes to buy Yahoo search: source

By Anupreeta Das

BOSTON (Reuters) - Microsoft Corp has proposed to buy Yahoo Inc's search business and take a minority stake in the Web pioneer, stopping short of a full-out merger, a person familiar with the discussions said on Monday.

As part of the deal, Yahoo would sell its Asian assets including significant minority stakes in Yahoo Japan and China's Alibaba Group, while Microsoft would buy a chunk of what remains of the company, the source said.

The talks were revealed by the two companies on Sunday, but they declined to reveal the terms of the discussions. Earlier this month, Microsoft walked away from a proposal to acquire Yahoo for $47.5 billion, or $33 per share, after Yahoo rebuffed the offer, saying it would only settle for $37 a share.

The new deal, if completed, would forge an alliance between the two companies that would represent an alternative means of competing with rival Google Inc, whose ubiquitous search engine has made it an online advertising powerhouse.

The proposal represents an outline of Microsoft's current thinking and it does not yet put a value on Yahoo's search business, said the source, who was not authorized to speak on the record because the discussions are confidential.

Microsoft and Yahoo representatives declined to comment.

Shares of Yahoo fell as much as 0.87 percent on Monday, before closing up 2 cents at $27.68 on Nasdaq. Microsoft dropped 1.8 percent to $29.46.

Collins Stewart analyst Sandeep Aggarwal estimates Yahoo's search advertising business is worth about $21 billion, while putting the value of its international assets at $9.25 billion, according to a research note he published on Monday.

"Microsoft is the most interested in Yahoo Search," said Aggarwal, who added that Microsoft may buy parts of Yahoo for a premium or buy all of Yahoo and then spin off certain assets.

Microsoft said on Sunday that it was talking with Yahoo about an alternative transaction that did not involve a full buyout after withdrawing its sweetened $47.5 billion bid for the company on May 3.

CHASING GOOGLE

Yahoo is a distant second to Google Inc in Web search in the United States, and Microsoft is third.

Combined, Yahoo and Microsoft would have around a 30 percent U.S. share, compared with Google's roughly 60 percent, according to figures from research firm comScore. Google's lead is even larger on a global basis, according to comScore.

The proposal from Microsoft would likely complicate ongoing discussions between Yahoo and Google. The two companies are still talking about a possible search advertising partnership, people familiar with those discussions have told Reuters.

Talks between Yahoo and Microsoft resumed after Microsoft insisted for two weeks that it had moved on from its pursuit of Yahoo, prompting shareholders of the Web company to criticize its board for mishandling negotiations.