“Do you let the fox in the henhouse?”

So asked Jerry Yang, Yahoo’s co-founder and chief executive, as we chatted for more than an hour one afternoon last week at Allen & Company’s annual conference here.

The fox in question, of course, is Carl Icahn, the activist investor who is trying to oust Mr. Yang and the Yahoo board so he can sell the company to Microsoft. “I don’t mean to impugn anyone’s personal integrity,” Mr. Yang quickly added. Let it never be said that Mr. Yang lacks manners.

Yahoo — and Mr. Yang’s fate — were Topic A at the annual billionaires’ summer camp, as rival moguls gossiped about whether Yahoo would end up in the hands of Microsoft. While Mr. Yang casually smoked a cigar Thursday evening outside of the bar with Richard Parsons, the chairman of Time Warner — who himself battled with Mr. Icahn two years ago — the debate was raging at virtually every table.

“There won’t be a deal. There are bad personal feelings,” proclaimed Rupert Murdoch of the News Corporation, who lost his wedding ring that night and got down on all fours — along with half a dozen other mogul types — to search for it. (They didn’t find it.) Another mogul, a longtime friend of Mr. Yang’s, took the opposite view: “He’s a goner.”

What almost no one here knew was that behind the scenes, Mr. Icahn had been conducting an extraordinary round of secret negotiations with Steve Ballmer, the C.E.O. of Microsoft, the result of which was yet another Microsoft offer for Yahoo. The new bid from Microsoft and Mr. Icahn spilled into public view Saturday night. Yahoo quickly rejected it.

For good reason. The deal was so ridiculous — it called for Yahoo to

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[YHOO  Loading...      ()   ] sell its search business to Microsoft

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[MSFT  Loading...      ()   ] and for Mr. Icahn to take over the board of what was left of the company after assets were spun off and dividends paid out — that when the moguls here started to learn the details, it actually began to change the perception of Mr. Yang’s predicament.

Think about it: “What global company in their right mind formally teams up with Mr. Icahn?” as one invitee asked. Mr. Icahn may be a brilliant investor — he actually doesn’t get enough credit or respect for that — but let’s be honest, he doesn’t use a computer, let alone know how to run Yahoo. And what does it say about Microsoft? The notion that Yahoo’s board would sell the crown jewel, its search business, to Microsoft and then hand over the scraps of the company to Mr. Icahn is, as Roy Bostock, Yahoo’s chairman, said, “absurd and irresponsible.”

(The war of words continued with Mr. Icahn firing back on Monday: “I have yet to see a company distort, omit and twist events and facts in the manner that Yahoo has done.” Separately, Microsoft claimed its proposal “did not include changes to Yahoo’s governance,” though that’s exactly what its partner, Mr. Icahn, was calling for.)

Mr. Yang may once have looked like an entrenched founder unwilling to sell the company, but now it is Microsoft that has those in the deal-making world wondering about its judgment. “At this point, it’s embarrassing,” one technology C.E.O. whispered just out of earshot of Bill Gates. “Ballmer should either buy the company or forget it.”

To the other moguls, it appears as though Microsoft doesn’t have the courage of its convictions — and doesn’t even really seem to know how to proceed.

“If Microsoft called to buy your company, would you call them back?” a media executive asked, incredulously. Eric Schmidt, chief executive of Google, echoed that view. “Microsoft has a long history of having deals that look quite good and end up looking not so good when you look at the fine print,” he said.

Mr. Yang, dressed in a yellow button-down shirt and khakis, paced around a private room overlooking a duck pond as we spoke. He insisted that he had been prepared to sell the company to Microsoft all along, and practically pleaded with Mr. Ballmer to negotiate a serious deal. Microsoft, he believes, has tried to undermine Yahoo’s business so it can buy the company at a fire-sale price. Judging by Microsoft’s recent actions, it is becoming harder to argue with him. “It is now more clear in hindsight what they wanted to do,” Mr. Yang said.

One big problem Mr. Yang has is that some of Yahoo’s biggest shareholders — several of whom showed up in Sun Valley, including Bill Miller of Legg Mason and Gordon Crawford of Capital Research — believe that he should have sold the company to Microsoft when it had a $33-a-share offer on the table. On that score, of course, they may be right to be upset.

But let’s be real: The $33 a share has always been a bit of a misnomer — since the offer was partly in stock, it is worth only $29 and change today.

In less than a month, these shareholders will have a chance to express their displeasure when Yahoo holds its annual meeting — when they will vote on whether to oust the Yahoo board and install Mr. Icahn’s slate. In the days preceding the Sun Valley conference, Mr. Ballmer, for the first time, publicly backed Mr. Icahn, announcing that if the activist investor were able to take control of the board, Microsoft would come back to the negotiating table.

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