Microsoft, Yahoo Merger Talks No Longer Active, Says WSJ

Paul Sakuma / AP Yahoo!'s headquarters in California.

Merger talks between Microsoft and Yahoo have reportedly broken down and are more likely lead to a cooperative effort of sorts, according to recent media reports.

The New York Post reported early on Friday that Microsoft had stepped up its efforts to buy Yahoo in an effort to fend off a common competitor, Web search leader Google . The Post said that Microsoft made the bid a few months ago; though Yahoo reportedly spurned the advances, the paper said discussions were continuing.

Since then, the Wall Street Journal reported that merger discussions were no longer active, but said the companies may still explore other ways of cooperating.

Meanwhile, the New York Times said the two companies are in talks about a joint venture or some other form of cooperation. The discussions, still in preliminary stages, are part of an ongoing dialogue that the two companies have been holding for more than a year, the Times said, citing people briefed on the talks.

Yahoo shares jumped on the merger speculation, while Microsoft's stock fell, but has since recovered from earlier lows.

The two companies have held informal talks over the years, but the latest approach comes as Microsoft seeks a deal to counter Google's rapid growth.

"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. "You can't find a stronger buyer than Microsoft and while it would spur a lot of political and regulatory noise, everyone knows in the end that the deal would go through."

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.

Microsoft and Yahoo declined to comment on the reports.

Investment bank Goldman Sachs advised on the process, the 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.

The renewed talks are a sign of Google's power, the Wall Street Journal said, and are also an indicator of problems with in-house efforts at Yahoo and Microsoft. A deal could help Microsoft attract advertisers to its online businesses.

"We've been a significant believer in a Yahoo-Microsoft combination (because) both Yahoo and Microsoft both need to create a bigger presence (in advertising) to compete with Google," said Marianne Wolk, an analyst with Susquehanna Financial Group.

Google agreed to buy DoubleClick last month for $3.1 billion, accelerating a push into the graphic ad market. Google beat out Microsoft and Yahoo to win the deal, sources said.

Copyright 2008 Reuters. Click for restrictions.