Yahoo, which has rejected a $44.6 billion takeover offer from Microsoft, is holding talks with News Corp. about combining MySpace and other News Corp.-owned online properties with Yahoo.
A source close to the situation told CNBC that Yahoo's talks with News Corp. focus on the media giant acquiring a stake in Yahoo. Just last week, News Corp. chairman Rupert Murdoch made it clear that News Corp would not buy the whole company.
The source stressed that Yahoo is actively considering a series of alternatives, and that Google and Time Warner's AOL are also talking to the company.
Under a deal detailed in the Wall Street Journal, News Corp. would get a stake in Yahoo that could be more than 20 percent.
Media investor blog Silicon Alley Reporter quoted unnamed sources on Tuesday saying that News Corp and Yahoo are still discussing a possible transaction, but provided no details.
According to the Journal, which is also owned by News Corp., the deal under discussion is similar to one considered by the two companies over the past 18 months. The deal would allow Yahoo to remain independent while giving News Corp. substantial control over a huge array of Internet properties and advertising opportunities, the Journal said.
The report came as Yahoo's second-biggest investor urged Microsoftto raise its $42 billion bid for the Web pioneer and warned Yahoo it has few options left, raising the pressure on them to seal a deal.
In a quarterly letter to investors released on Tuesday, Bill Miller, the star stock-picker at U.S. asset manager Legg Mason, estimated fair value for Yahoo to be near $40 per share, versus Microsoft's original offer of $31 per share.
Microsoft "will need to enhance its offer if it wants to complete a deal," Miller wrote in a February 10 letter, one day before Yahoo formally rejected Microsoft's plan for the company.
"It will be hard for (Yahoo) to come up with alternatives that deliver more value than (Microsoft) will ultimately be willing to pay," Miller wrote. "We think this deal is a strategic imperative for (Microsoft) and that (Yahoo) is in a tough spot if it wishes to remain independent."
Miller's comments came as major institutional Yahoo shareholders have been working behind the scenes to get the parties to strike a deal, analysts say. Around 53 of the top 100 big funds in Yahoo hold shares in both companies, according to the most recent shareholder data available from September.
Institutional shareholders hold about 75 percent of Yahoo's stock, according to Reuters data, versus 10 percent for company insiders, including co-founders David Filo and Jerry Yang.
Legg Mason Capital Management, the unit of Legg Mason run by Miller, owns more than 80 million Yahoo shares, or 6 percent of the company, trailing only Capital Research & Management's 11 percent holding.
Besides talking with News Corp, Yahoo has explored an advertising partnership with its biggest rival, Internet search leader Google.
Although Google probably could help elevate Yahoo's recently drooping profits, the alliance would likely face antitrust hurdles because the two companies operate the Web's two biggest ad networks and eliminating one would reduce competition.
If Yahoo is able to work out a deal with News Corp, analysts believe Microsoft will simply raise its offer because it needs the acquisition to counteract Google's dominance of the online ad market -- a battleground that is rapidly reshaping the technology and media industries.
"Buying Yahoo makes tremendous sense for Microsoft, more sense than any other company in the world," said Ken Marlin, a New York investment banker specializing in media and technology deals.