Kara Swisher

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Update on Yahoo-Microsoft Talks: “Hot and Heavy”


Microsoft and Yahoo have been busily ferreting away on talks about search and advertising partnership possibilities in what one person close to the situation described as “hot and heavy.”

But exactly how hot and how heavy depends on which side you are talking to, with Yahoo seeking to play it a bit cooler and Microsoft, according to many sources, aggressively interested in striking a deal.

Nonetheless, sources within Yahoo (YHOO) said that the company is also eager to make what could be a lucrative arrangement with Microsoft (MSFT), which could come sooner than some expect.

Yahoo is not likely to talk about its Microsoft discussions when it announces first-quarter earnings tomorrow.

Yahoo and Microsoft spokesmen declined comment after being queried by BoomTown tonight.

But their execs are talking more, nonetheless, said numerous sources.

In fact, several sources said, Microsoft executives–including a key M&A and strategy exec, Charles Songhurst, and digital head Qi Lu–have been in Silicon Valley recently in talks with Yahoo execs.

Li, who used to work at Yahoo as a top tech exec in search before moving to Microsoft, is playing a key role in the discussions, said several sources.

About two weeks ago, BoomTown first reported that the star-crossed pair were trying to make another go at coming together in the business relationship.

Both Yahoo CEO Carol Bartz and Microsoft CEO Steve Ballmer, I reported, had even met in person in Silicon Valley.

That meeting went well, said many, and several Yahoo sources said a deal could come, especially if Microsoft and Yahoo can settle disputes over a number of issues.

Those include the size of the large revenue guarantee and payment Microsoft would make in exchange for selling Yahoo’s search ads, and perhaps more, related to search.

In that deal, Yahoo might take over sales of display ads for the pair.

Whether the pair can come to an agreement is anyone’s guess, though, given all the drama between the companies over the last 18 months.

Talks between the pair have “flamed in and out,” said many people at both companies, due to a range of thorny items.

Yahoo is very interested in getting a high TAC rate–basically, a payout to Yahoo on each search query–for example, and also wants to make sure it has rights to all the data related to search.

That’s because some within Yahoo are insistent that search and display need to be closely married together and that it would be dangerous for Yahoo to split them up by outsourcing some of that business to Microsoft.

That said, Yahoo could also save enormous amounts of money it spends on search if Microsoft took over some of the business.

Many point to last summer’s botched offer from Microsoft to Yahoo via current Yahoo board member Carl Icahn, who was fighting with Yahoo at the time in a proxy war, as a way to think about various parts of the discussion.

But, warned the sources, the new talks are different and focus intently on keeping Yahoo independent.

In any case, that search deal offer then included:

– $1 billion for Yahoo’s search business and a five-year guarantee of $2.3 billion in search ad revenue, with an option to renew for another five years at a $1.6 billion minimum

– An offer by Microsoft to buy $3.9 billion of Yahoo shares, and lend the company $2.8 billion at a five percent interest rate, by taking over a part of its debt. The money would be used to give a special dividend to shareholders

– An agreement to raise the TAC rate to 85 percent from the former offer of 70 percent, for three years, and to 75 percent after that

That misbegotten and overly complex offer also included a time constraint, a spinoff of Yahoo’s Asian assets and Icahn getting control of Yahoo in the mix, which is ironic since he is now a Yahoo insider.

In other words, a lot of water has flowed under the Yahoo-Microsoft bridge.

It has to, as many think it important that the two are partnered closely together in search and display advertising, even though they still compete on many other fronts in the Internet space.

By joining their forces, they might create a sale that is much more attractive to advertisers and allows for better competition against search powerhouse Google (GOOG).

This is especially true given that Yahoo is the No. 2 player in search, for example, with a much larger share than third-place Microsoft. According to recent surveys, Google has a 63 percent share, while Yahoo has 20.6 percent and Microsoft eight percent.

But it is also in Yahoo’s interest to move fast, since its search traffic could be declining soon, according to some analysts.