LOS ANGELES (Reuters) - Shares of Yahoo Inc. YHOO.O soared as much as 19 percent to their highest level in nearly a year on Friday after two newspaper reports said the company and Microsoft Corp. (MSFT.O) were in preliminary merger talks to take on common foe Google Inc. (GOOG.O)
But the stock pulled back after contradictory reports said the two companies may work out a joint venture or another form of cooperation that would stop short of a full merger. A source close to the situation confirmed that any talks had cooled.
The Wall Street Journal initially said on Friday that the two companies had engaged in merger talks in recent months, but it said later that those talks were no longer active.
The New York Post reported that Microsoft had made an offer to buy Yahoo a few months ago, but Yahoo spurned the advances.
The paper, which put a price tag of $50 billion on a Yahoo takeover, said discussions continue between the two companies.
Yahoo’s market value shot to $45 billion from $38 billion before the report. Microsoft is valued at a little more than $300 billion. Both companies declined to comment.
“It’s been talked about for a long time, ever since Google came into the picture. I can’t imagine a more perfect deal,” said Peter Lobravico, vice president of risk arbitrage sales/trading at brokerage Wall Street Access.
In regular trading, Yahoo’s stock rose nearly 10 percent to $30.98 on Nasdaq. Microsoft shares fell 1.3 percent to $30.56.
In extended trade, Yahoo shares fell to $30.57 and Microsoft rose to $30.58.
Investment bank Goldman Sachs is advising on the process, the New York Post said. The bank declined to comment.
One banking source said that investment banks had been pitching Microsoft on the idea of buying Yahoo for months.
Analysts often dismiss a takeover of Yahoo by Microsoft since the two companies have such different cultures and Microsoft usually prefers to buy small companies with interesting technology.
Both companies are facing a serious threat from Google.
The Web search leader is extending its lead on both companies as it continues to gain market share and grow three to four times faster than Microsoft and Yahoo.
Google’s first quarter revenue grew 63 percent compared with a year earlier.
Google agreed to buy DoubleClick Inc. last month for $3.1 billion, accelerating a push into display advertising market.
The company beat out Microsoft and Yahoo to win the deal, sources said.
Yahoo CEO Terry Semel is scheduled to be in Seattle next week to speak at a Microsoft conference on online advertising.
He will deliver a speech and then answer questions on stage from Joanne Bradford, Microsoft’s chief media officer.
If Microsoft decides to buy Yahoo, it would be the largest acquisition the company has ever undertaken.
Up to now, its biggest purchase was a $1.33 billion deal in 2002 to acquire Navision, a maker of business software.
Microsoft investors said a deal looked to be a negative for the world’s largest software maker at first glance, because it would be an admission that its recent investments in online services were a failure.
“It might strike me as an act of desperation,” said Todd Lowenstein, a co-portfolio manager for HighMark Capital Management’s Value Momentum Fund. “Trying to go toe-to-toe with Google in search is not the best use of resources.”
Yahoo’s revenue growth, which had been upward of 30 percent in recent years, tumbled in the first quarter to just 7 percent — performance described by Goldman Sachs as “sub-par” growth for any big Internet stock.
Yahoo, which lost Microsoft as a key Web search advertising customer when Microsoft decided to create its own ad system, has been undergoing a major transition in its Web search advertising business.
It unveiled an upgraded system, Panama, in February.
Analysts widely expect Yahoo’s revenue, largely from ad sales, to rebound to around 20 percent growth levels in the second half of 2007 — similar to the growth rates of Microsoft’s own online advertising business.
Additional reporting by Paritosh Bansal, Megan Davies and Michael Flaherty in New York, Jim Finkle in Boston, and Eric Auchard in San Francisco