Microsoft Corp said on Sunday it has proposed an alternative deal to Yahoo Inc, rather than a full acquisition, in a move that could save the web pioneer from fighting a proxy battle with financier Carl Icahn.
"Microsoft is considering and has raised with Yahoo an alternative that would involve a transaction with Yahoo but not an acquisition of all of Yahoo," the company said in a statement without clarifying what that alternative might be.
Microsoft emphasised it was not proposing to make a new bid to buy all of Yahoo but could reconsider.
A source familiar with Microsoft's thinking said Yahoo was responsive to Microsoft's latest proposal but emphasised that discussions between the two companies might not result in a deal.
The New York Times reported that Microsoft and Yahoo may form a partnership or joint venture for search-related advertising to take on Google Inc, which dominates the search market with a share significantly larger than a combined Yahoo and Microsoft.
For its part, Yahoo continues to talk with Google Inc about a search advertising partnership and a deal could come as early as this week, a source familiar with the talks said on Thursday.
The statement from Microsoft comes on the heels of a proxy campaign launched on Thursday by Icahn to replace Yahoo's board with directors who would reopen talks with Microsoft, saying Yahoo had acted irrationally in refusing the giant software.
Meanwhile, Microsoft and Icahn have not held discussions about Yahoo, said another source close to the company. A spokesman for Yahoo declined to comment and Icahn could not be reached for comment.
In a letter to Icahn last week, Yahoo board Chairman Roy Bostock said a new board would not be in the best interests of Yahoo investors, adding that Yahoo would consider any deal from any party, including Microsoft, if it offered the company full value.
Icahn, who has said he had accumulated 59 million shares and options in Yahoo, also has the support of Paulson & Co, a $30 billion hedge fund that has amassed a 3.4 percent stake in Yahoo, and other investors upset by the board's handling of negotiations with Microsoft.
Microsoft had said it had moved on from Yahoo and remained committed to building an online advertising powerhouse to rival Google. Company executives had said in making a case for a Yahoo acquisition that buying the web company would be the fastest way to close the gap on Google.
In an e-mail to employees on Sunday, Kevin Johnson, president of Microsoft's platform and services division, said the company must strengthen its online business regardless of how talks with Yahoo turn out.
"The fact is that we are not where we want to be in this business yet and we've been in this position longer than we'd all like," Johnson wrote in the e-mail.