Microsoft's alternative proposal for Yahoo involves Microsoft buying Yahoo's search business and taking a minority passive stake in the company, once Yahoo has spun off its Asian assets, a person familiar with the discussions said on Monday.
The proposal is little more than an outline reflecting Microsoft's thinking, and does not yet include a value for Yahoo's search business, said the source, who was not authorized to speak on the record because the discussions are confidential.
Microsoft said earlier that it proposed an alternative deal to Yahoo rather than a full acquisition. But that move was unlikely to win favor with financier Carl Icahn, a person familiar with his thinking said.
Icahn launched a proxy campaign on Thursday to replace Yahoo's board with directors who would reopen talks with Microsoft , saying Yahoo had acted irrationally in refusing the giant software company's $47.5 billion bid.
Options Investors Betting on a Deal
Option investors on Monday are betting heavily that Yahoo may strike a deal of some sort with Microsoft, spurred in part by pressure from Icahn.
As part of the alternative deal proposed by Microsft, the company would also buy a minority stake in what remains of the company after Yahoo sells its Asian assets, the source said.
Representatives of software giant Microsoft and Yahoo, the No. 2 U.S. search engine after Google Inc , declined to comment.
"The question now is what form this deal will take," said Joe Kinahan, chief derivatives strategist at online brokerage thinkorswim in Chicago. "During Monday's (option) trading, the perception was that this deal would get done at $30 (per share) or better."
Microsoft said it had proposed an alternative deal to Yahoo over the weekend, rather than a full acquisition of Yahoo as it had originally proposed.
Yahoo shares rose almost 2 cents to close at $27.68 on Nasdaq. In the U.S. options market, roughly 169,000 calls and 163,000 puts traded in Yahoo, below its average daily volume 430,000 contracts, according to option analytics firm Trade Alert.
But a large part of the put volume was largely due to more than 57,000 lots traded in the July $27.50 puts, which might have been sold as part of a large spread or a closing trade, both of which are typically perceived as bullish transactions.
Speculators bought June and July calls allowing them to buy Yahoo shares from $27.50 to $32.50 in hopes of making a profit if the deal commences at those prices or better, Kinahan added.
"We were really active in buying July $30 and $32.50 calls. My customers believe that there will be some positive outcome in the Yahoo shareholders meeting due on July 3," said an options trader who declined to be identified.
"Traders are also rolling over their June positions into July in anticipating of that meeting," the trader said.
The Icahn Factor
The latest tactic in Microsoft's pursuit of Yahoo comes as the Internet media company faces a bruising proxy battle with financier Icahn, who is seeking to install his own slate of Yahoo directors.
Icahn, who holds a large number of Yahoo shares and options, filed a preliminary proxy on Monday to nominate 10 directors to Yahoo's board.
"Clearly there are investors out there who think Icahn's plan has teeth; or at least that Yahoo will get back to $31 if Microsoft comes back with that offer again," said Randy Frederick, director of derivatives at Charles Schwab.
Microsoft made a cash-and-stock offer of $31 per Yahoo share in late January. Earlier this month, Microsoft discussed raising that offer to $33, but walked away after Yahoo management held out for $37.
"The Icahn factor is very important," said Michael Schwartz, chief options strategist at Oppenheimer & Co. "Based upon his track record of enhancing stockholders' value, the June $30 calls look like a good speculative trade."
In order for the June $30 calls to be profitable, Yahoo shares would need to go above $30, plus the price of their premium. "Option investors believe that the deal will be worth more than $31," Schwartz said.