Apparently, not everyone leaves Yahoo (YHOO) to join Microsoft.

On Friday, sources said, it was announced internally at Microsoft (MSFT) that Karl Siebrecht (pictured here), the former president of Atlas at aQuantive, is joining AdReady at the end of the month as president and COO.

AdReady, based in Seattle, bills itself as an “advertising technology company focused on making online display advertising accessible and effective for advertisers of all sizes.”

The start-up has raised a total of $12 million in venture funding from Bain Capital Ventures, Khosla Ventures and Madrona Venture Group.

Aaron Finn is its current CEO and president, but is apparently giving up one title to Siebrecht.

And–probably no coincidence–aQuantive’s former CEO is Brian McAndrews, who is now managing director at Madrona.

But, sources said, Siebrecht was introduced to Finn through David Rosenblatt, an advisory board member of AdReady–and who competed with Siebrecht as CEO of DoubleClick, which was bought by Google (GOOG).

Also interestingly, Jason Kilar, CEO of premium video site Hulu, is on AdReady’s board.

Oh, it is a small tech world, after all.

Microsoft bought aQuantive–which is now called Microsoft Advertising–in mid-2007 for $6 billion and Atlas was one of its units.

Microsoft is searching for a major executive to run its world-wide online sales, said several sources close to the situation, even as talks with Yahoo about a deal to partner in its search and display advertising businesses continue.

“They need to find a way to make money in display,” said one source close to the situation. “Or, I guess, find a way to not lose quite so much.”

The software giant has been trying to build its online business for many years now, spending a lot of money and not getting very much traction.

In its recent quarterly results, in fact, Microsoft’s online services got hit badly, with a 14 percent decline in revenue from a year ago to $721 million. Losses doubled to $575 million.

Sources said Microsoft (MSFT)–which has hired headhunting firm Spencer Stuart to conduct the search–is looking for more execs to turbocharge the situation, with one criterion being that the person hired is “another ambassador to Madison Avenue.”

Last fall, it did that by hiring Time Inc. ad exec Robin Domeniconi to take over as the new VP, U.S., Microsoft Advertising.

That’s why the new sales candidate the company is looking for might only be for someone to lead Microsoft’s international ad sales, since the exec in charge of that business left in December as part of a mass of changes in the wake of the hiring of digital head Qi Lu.

Those changes included the departure of that exec, Global VP of Sales Bill Shaughnessy, as well as its top online ad sales exec, Brian McAndrews, and the rejiggering of its online sales unit.

In that switch, Microsoft said in a press release: “The field sales organizations in the Online Services Group will move to Microsoft’s centralized Sales, Marketing and Services Group led by chief operating officer Kevin Turner. This group, called Consumer & Online, will be led by Corporate Vice President Darren Huston and will include the Global Advertising Sales and Services organization, led by vice president Bill Shaughnessy.”

The move to centralize, according to sources, has been controversial within the company, since it means all sales are being lumped into one megagroup.

That could all change dramatically again if there is any success in the talks Microsoft has been having with Yahoo (YHOO) about outsourcing its online display sales to the Internet giant. The pair have been discussing partnering over search and advertising.

While such a deal might not happen–Yahoo has been especially reticent to separate its search and display businesses–the two sides have been discussing several scenarios in a bid to compete with online giant Google (GOOG).

Among the latest ideas is one in which Yahoo would take over both search and display advertising sales and Microsoft would run the tech behind the scenes.

Such a deal would be a major shift for both companies in their business focus and would also tether them together.

While BoomTown is still gathering information, it looks like longtime Microsoft exec Yusuf Mehdi (pictured here), who is now in charge of marketing, online audience business development and product management for MSN and the search properties, will get more added to his portfolio, including overall business development for the online properties.

Mehdi, whose current title is SVP of the Online Audience Business, could also eventually get purview over programming for MSN too, said several sources.

Both those business units currently (and somewhat inexplicably) report to Satya Nadella, the SVP who heads engineering for Microsoft’s search, portal and advertising platform group.

Nadella and Mehdi are the two key execs who report to Qi Lu, a former Yahoo tech star who was recently hired as president of Microsoft’s online services group

What that means for MSN’s Corporate VP Erik Jorgensen and the GM of its Global Media Group, Greg Nelson, who report to Nadella, is unclear.

But it appears that the Microsoft (MSFT) online group is essentially being split into two clear parts: Engineering, and business and content operations.

Advertising sales, which had previously been under now-departed Microsoft exec Brian McAndrews, has been moved to Microsoft’s centralized Sales, Marketing and Services Group, led by chief operating officer Kevin Turner.

The changes are interesting, given all the behind-the-scenes talks that are now going on between Microsoft and Yahoo (YHOO) and Time Warner (TWX) online unit AOL over their search and search advertising businesses.

Microsoft has been seeking to take over search for both Yahoo and AOL, with its CEO Steve Ballmer recently in talks with both companies, in order to give it a decent market share in its ongoing quest to compete with Google (GOOG) in search.

Right now, Google dominates that market with an over 70 percent share, while Microsoft has just under 10 percent.

Microsoft is announcing its second-quarter earnings today, and many expect it to also announce layoffs, due to the tough economic environment.

In the wake of the changes at Microsoft’s online division, a senior advertising sales exec, Bill Shaughnessy (pictured here), is set to leave his post, the company confirmed.

The departure was first reported in Ad Age, which said Shaughnessy’s future plans were undetermined and, in fact, noted it was unclear why the longtime Microsoft (MSFT) staffer of 15 years was leaving.

BoomTown found the answer looking at the very bottom of the press release announcing the hiring of former Yahoo (YHOO) tech exec Qi Lu as head of its online services group:

“As part of today’s announcement, several teams will move to further align resources. The field sales organizations in the Online Services Group will move to Microsoft’s centralized Sales, Marketing and Services Group led by chief operating officer Kevin Turner. This group, called Consumer & Online, will be led by Corporate Vice President Darren Huston and will include the Global Advertising Sales and Services organization, led by vice president Bill Shaughnessy.”

The move to centralize, according to sources, has been controversial within the company, since that means all sales are being lumped into one mega-group.

Shaughnessy has worked on a range of MSN properties, as well as for the Windows group.

In his most recent job, he worked closely with Brian McAndrews, the top online ad sales exec at Microsoft, who announced he was leaving the company on the same day Lu was hired.

McAndrews had been a contender for the digital head job.

According to a Microsoft profile of him, Shaughnessy was global VP of sales, marketing and services, “responsible for the business leadership and management of its international business operations outside of the United States, including the Greater Asia region. His responsibilities include sales, marketing, business development, programming and regional and country management.”

With so many more ex-Yahoos out there now that the most recent layoffs have taken place, BoomTown put out feelers to a range of them to ask whom they would like to run the company they no longer work for.

After all, who better than to pick a new CEO than an ex?

The response I got was swift and varied wildly, depending on which way the ex-Yahoo felt the company should go, including quite a few who thought Yahoo needed to sell itself off completely.

Some considered Yahoo (YHOO) a media and advertising company, for example, while others thought of it as a more Web tools outfit. Still, others considered it a turnaround situation, requiring a wholly different kind of CEO.

Perhaps therein lies the problem–it is still hard to define precisely what Yahoo is and is not, even for its ex-employees.

In any case, here are some of the best suggestions:

1. The Media Mogul

“I think they need to sell to a media company,” said one ex-Yahoo, who posits the move needs to be drastic enough to truly reset Yahoo.

In this scenario, search gets sold to Microsoft (MSFT) and Yahoo’s online content is combined with media assets of a big entertainment and news conglomerate.

That would make the leader of Yahoo one of the following: Bob Iger of Disney (DIS); Rupert Murdoch/Peter Chernin of News Corp. (NWS); Jeff Zucker of General Electric (GE) unit NBC Universal; or Les Moonves of CBS (CBS). (News Corp. is the owner of this Web site.)

2. The Insider

A lot of votes here for former Yahoo COO Dan Rosensweig and not so many for current President Sue Decker.

Why? Several ex-Yahoos mentioned a need to refocus intently on products and the need for a product-obsessed leader, but one who also knew Yahoo well and could get things moving without needing a lengthy learning curve.

“Since Dan R. left, I think there’s been a definite void (at the senior exec level) on the product/consumer expertise and advocate front,” said another ex-Yahoo.

Other execs mentioned are former Yahoos Jeff Weiner and Jeff Mallett.

But several also pointed to board member John Chapple, who is the one most insiders say they are guessing will be the next CEO, especially since he has been reaching out to Yahoos on many levels and asking questions.

3. The Microsoftie or Googler

The new top name here is obviously recently departed online ad exec Brian McAndrews, former CEO of aQuantive, whom many think would be a strong pick and would focus the company on advertising.

In addition, most of those leaving–including several technical people–all seem to agree that Yahoo needs to get out of the search business, and pronto.

Said one engineer: “I hate to say this, but as good as we can be, we cannot compete in the war that is breaking out between Google and Microsoft. And it will only get uglier.”

Other names mentioned in this category include Yusuf Mehdi and Kevin Johnson of Microsoft, as well as Tim Armstrong of Google (GOOG).

4. The Fixer

While there are a lot of different opinions out there among the ex-Yahoos I spoke to, all agree that the company is in need of a sharp operator and someone who can do what it takes to turn the company around quickly.

That means someone like former Vodafone CEO Arun Sarin, whose name has popped up recently, or even nontechie execs known for operational skills.

“We need a decisive leader, given how slowly it takes for things to change at Yahoo, who has a real sense of urgency from the minute he or she gets the job,” said one ex-employee.

Another former exec described it as a “two-step process.” First, the turnaround CEO needs to come in and reorient, focus, and get the company going in the right direction, then a more product-oriented person can be installed under that CEO later.

5. The Holy Grail-Steve Jobs Option

I think the most interesting idea I got from all the many former Yahoos I spoke to was that Apple (AAPL) CEO Steve Jobs swoop in and buy Yahoo.

When I laughed out loud at this notion at first, the exec insisted that it was a feasible idea, given that Apple was interested in expanding its platform beyond its now-popular devices.

It’s an interesting bit of wishful thinking, of course, to imagine a “great leader” to calmly guide the company back to its roots.

Jobs, in fact, memorably addressed a meeting of Yahoo VPs in the fall of 2007. As I wrote then: “Jobs basic message [to Yahoo]: You have great assets–just like Apple did–and now it is all about execution.”

Yes, that tiny little detail.

6. Raise the Yangtanic

Interestingly, pretty much all the ex-Yahoos I talked to–as angry as some are at him for his tenure as a CEO less successful at execution and the ensuing loss of market value at Yahoo–said they did feel there was a need for Co-Founder Jerry Yang to stay around in a significant way.

“Jerry has been a really bad CEO,” said one former employee. “But he could still be an important leader at Yahoo and give the company the kind of inspiration it so desperately needs.”

Not everyone is on board with that.

“I completely disagree that Jerry should stay around. Jerry is one of the main issues at Yahoo and he and [David] Filo must go, as well as most of the board,” said one former Yahoo. “There needs to be free rein for the new CEO to make changes and that won’t be possible if Jerry is still there. Jerry is a nice guy and his heart is in the right place but he has failed as both board leader and CEO and the company needs to start fresh if it is to have a chance.”

Adds the ex-Yahoo: “Steve Jobs would be great, but I think he is busy.”

BoomTown strives to bring readers the very best in internal memo decoding, and this one is just too good to pass up.

Microsoft CEO Steve Ballmer sent a short memo to employees this afternoon about finally hiring someone to head the software giant’s lackluster digital efforts.

That someone, as this column reported earlier today before the official announcement, was former Yahoo (YHOO) tech star Qi Lu. He will become president of the Online Services Group at Microsoft (MSFT), right after the new year.

Thus, let us try to read between the lines:

What Steve wrote: From: Steve Ballmer
Sent: Thursday, December 04, 2008 1:39 PM
To: Microsoft–All Employees (QBDG)
Subject: New Leader of Online Services Group

Search, advertising and online services are critical to Microsoft’s long-term strategy. To succeed, we need the right talent. Today, I’m pleased to announce that Qi Lu will join Microsoft as president of our Online Services Group. Qi will oversee all efforts in search, our online advertising platform, and all of our online information and communications services. Qi will join Microsoft on Jan. 5 and report to me.

Translation: Really, taking five months to pick someone to head Microsoft’s most critical arena for the future is not a long time. If you’re counting in dog years, that is! Woof!

But, I digress, we have a winner and, best of all, he’s from Yahoo, costing us $39.9 billion less than it would have cost to get Lu with the whole company.

What Steve wrote: Qi is one of the most respected technical minds in the industry. He comes to Microsoft after 10 years at Yahoo, where he most recently served as executive vice president of engineering for all of Yahoo’s search and advertising development efforts. Before joining Yahoo, Qi was a researcher at IBM’s Almaden Research Center. He has a doctorate in computer science from Carnegie Mellon, and he holds 20 U.S. patents.

Translation: Did I mention that Lu is from Yahoo? Let me say it again: Yahoo. The YAHOO that refused to take our $31 a share offer. That Yahoo. The Yahoo where–at one time–engineers would never consider leaving the Jedi forces of Silicon Valley to join the Death Star.

Jerry Yang, I am your bother.

Also, did I mention 20 patents?

What Steve wrote: Qi’s combination of deep technical expertise, proven leadership capability and broad business knowledge is rare in our industry. There is no one better qualified to guide our work to reinvent search and online advertising.

Translation: By “reinvent,” I mean, stop the endless flow of cash out of Microsoft pockets, even as Google (GOOG) is minting money in the basement of that irksome Googleplex in the search business.

If Lu manages not to lose, say, $3.23 trillion dollars, I will consider it a job well done!

What Steve wrote: While I’m excited that Qi is joining Microsoft, I’m sorry to share the news that Brian McAndrews has decided to transition out of the company. Brian came to us with the acquisition of aQuantive in 2007. Since then, he has helped build a world-class business in online advertising that provides a solid foundation for future growth. I have great respect for the important contributions Brian has made to Microsoft, and I wish him the very best in the future.

Translation: OK, so I dragged my feet on this selection process long enough to make Brian feel really badly, given he wanted the job too.

But, he’s an “ad” guy and Microsoft’s track record with those who don’t consider pocket protectors the height of fashion is, shall we say, rocky.

But don’t feel bad for Brian–Microsoft bought aQuantive for $6 billion last year, and he was CEO. You do the math.

Of course, it would be deeply ironic if Brian suddenly was in the running for the now-open Yahoo CEO job and I was facing him over the negotiating table over the search deal Microsoft has been salivating over, despite trying to seem only mildly interested.

Brian, honey, don’t take it personally that I went for the geek. It’s in my DNA.

What Steve wrote: On Monday at 4 p.m. Pacific Time, Qi will join me at Café RedWest for an Employee Town Hall. I encourage you to attend or to watch the webcast. If you have questions for Qi or me, please send them in advance to and we’ll try to answer as many as possible.

Steve

Translation: Free nachos and unintelligible discussions about algorithms for all!

Microsoft moved up its official announcement of former Yahoo (YHOO) tech star Qi Lu to be the head of its Online Services Group.

BoomTown reported on the selection earlier this morning.

As part of the changes, Microsoft digital ad head Brian McAndrews, who had also wanted the job, is leaving.

Here’s the full announcement from Microsoft (MSFT):

For Immediate Release
Dec. 4, 2008
Microsoft Appoints Dr. Qi Lu to Run Online Services Group
Yahoo! veteran to oversee Internet offerings for consumers, advertisers and publishers.

As part of today’s announcement, several teams will move to further align resources. The field sales organizations in the Online Services Group will move to Microsoft’s centralized Sales, Marketing and Services Group led by chief operating officer Kevin Turner. This group, called Consumer & Online, will be led by Corporate Vice President Darren Huston and will include the Global Advertising Sales and Services organization, led by vice president Bill Shaughnessy.

Former Yahoo tech star Qi Lu (pictured here) is poised to take on the big job of being Microsoft’s top digital executive, according to several sources inside and outside the company.

The appointment could be announced by Microsoft as early as next Monday.

A variety of details is still being ironed out, though, including whether the well-regarded techie Lu will be “paired” with another executive at Microsoft (MSFT) with more general business experience.

While Lu has managed large teams while at Yahoo (YHOO) and also huge projects, he does not have advertising sales and media experience that will be a big part of his purview at Microsoft.

In that job, he will be the boss of three strong digital execs at the software giant: Satya Nadella, the SVP who heads engineering for Microsoft’s search, portal and advertising platform group; Yusuf Mehdi, whose online services portfolio includes marketing, online audience business development and product management for MSN and the search properties; and Brian McAndrews, the SVP for the advertiser and publisher solutions group.

That executive partner could be some higher-ranking Microsoft exec or even CEO Steve Ballmer himself.

Elevating McAndrews is also a possibility, as he has also wanted the digital chief job and could decide to leave after not getting it. (He also would not be a bad choice for Yahoo’s new CEO.)

McAndrews was the CEO of aQuantive, an ad company bought by Microsoft for $6 billion last year.

As I have previously written, Lu would be a different choice for the post than many had expected.

In picking a serious tech-oriented executive over a more media-centric one, a dichotomy that Ballmer has been puzzling over, according to several people with whom he has spoken, he is clearly staking out an even more head-on fight with Google (GOOG).

But since a lot of Microsoft’s future rests on winning in the search and search-advertising space and trying to catch up with its techtastic Silicon Valley archrival from way back in the race, Lu is also well suited for the position.

Lu was EVP of engineering for the Search and Advertising Technology Group at Yahoo, where he ran all development initiatives for its search and monetization platforms. He was at Yahoo for a decade.

Importantly, Lu will definitely be a draw in bringing in top talent to Microsoft, especially from Yahoo.

Microsoft already grabbed another top Yahoo search exec, Sean Suchter recently.

And it is reportedly in a competitive bidding war with Google right now for yet another top Yahoo engineer.

Ballmer (pictured here), who led the now-defunct takeover bid for Yahoo and who has indicated a strong interest in buying only Yahoo’s search assets, could almost be seen as bypassing it all by sucking the talent right out of the place instead.

That might be a good move, since Yahoo’s board, while under intense Wall Street pressure to do so, is still debating whether to strike a deal with Microsoft to sell off its search and search ad business for massive guaranteed ad revenues.

While board member Carl Icahn has been pushing that deal, others on the board are still dubious that decoupling search from Yahoo is the right strategic move and believe it could leave the company at the mercy of Microsoft.

Yahoo might already be, especially if it keeps losing critical engineering talent to Microsoft. Being able to convince talent like Suchter and Lu to switch is a very bad sign.

Before he left Yahoo earlier this year, Lu was on the staff of the IBM Almaden Research Center, and worked at both Carnegie Mellon University and Fudan University in China (he also got degrees from both places).

And, in the kind of cred Microsoft likes, Lu holds 20 U.S. patents.

He left Yahoo after becoming dissatisfied with all the turmoil there, quitting in June, without another job lined up.

There has also been speculation that Lu would take a position as CTO of Facebook or even return to China for a tech job.

The well-respected Lu certainly has a multitude of choices, but the chance to lead money-laden Microsoft’s digital efforts–as it suits up for battle with Google–has been perhaps too hard to resist.

BoomTown has been poking around to try to figure out who Ballmer would choose for the digital head, ever since the man who used to be in charge, Kevin Johnson, departed in July for Juniper Networks (JNPR), after the software giant’s takeover bid to buy Yahoo failed.

I raised Lu’s name in a post several weeks ago as Ballmer’s top choice.

Several people close to the situation say the aggressive CEO has been keeping the deliberations close to the vest.

On an interesting side note, another one of Lu’s reports at Microsoft would be Harry Shum, corporate vice president of Search Product Development, who was his classmate and friend at Carnegie Mellon.

Please see this disclosure related to me and Google.

Here’s part of an internal memo BoomTown obtained about some small, but interesting, changes at Microsoft’s MSN unit, sent out by the GM of its Global Media Group, Greg Nelson, which is under the leadership of–well, frankly–a confusing panoply of execs.

Essentially, Nelson now reports to Satya Nadella, SVP of the Search, Platform and Advertising Group (think engineering and search) and Erik Jorgensen, Corporate VP of MSN (think business and other stuff).

In addition and apropos of nothing, Yusuf Mehdi serves as SVP of the Online Audience Business and Brian McAndrews is SVP of the Advertiser & Publisher Group.

Also, there is a Windows Live group that does mail, communications and groups too, and a lot of other digital bosses too numerous to mention.

You can see why I have been haranguing Microsoft (MSFT) CEO Steve Ballmer for a little digital clarity, especially around its consumer digital businesses and brands. But Microsoft–like a lot of tech-born businesses–loves to overdesign!

Ballmer has been searching for an overall head of that business to sort it all out since Kevin Johnson left in July, whose massive duties were divvied up.

While he has looked at a lot of execs from inside and outside the company, I recently posted that Ballmer’s latest quarry is former Yahoo tech star Qi Lu.

Only Ballmer knows for sure, many have told me, keeping his decision-making on the issue close to the vest.

But, as many insiders and outsiders familiar with the business have noted to me, whoever takes that role as its digital guru has some very hard decisions to make in all its arenas, from search to advertising to content.

There has been no share growth in search for Microsoft, for example, where archrival Google (GOOG) dominates, even as there have been billions of dollars of investment in data centers and engineers.

And it will fall to the person Ballmer ultimately selects as digital head to figure out what to do next.

Microsoft’s failed attempt to buy Yahoo (YHOO) was one way of dealing with the many issues Microsoft is facing, as well as its current interest in buying Yahoo’s search business.

In any case, here are some new changes at MSN, in Nelson’s words:

· Network Programming, led by Rob Bennett–This group will prioritize investments against Network priorities, shape audience strategy, set Network standards, and sponsor cross-network initiatives.

· Chief of Staff, Eva Corets–This role is responsible for driving team processes and business rhythm, and assisting with prioritization of network projects and interaction with cross-division and cross-Microsoft teams.

Yesterday, BoomTown opined that Microsoft was nearing a decision on who would become the head of its digital efforts.

And, according to several sources and some puzzling by me–if an agreement can be reached–I think that Microsoft (MSFT) CEO Steve Ballmer’s top choice is former Yahoo tech star Qi Lu.

While this is by no means a done deal, Lu is just the kind of top tech exec that Ballmer and Microsoft would warm to over a more media-centric choice like former Yahoo COO Dan Rosensweig or former AOL head Jon Miller.

Lu was EVP of engineering for the Search and Advertising Technology Group at Yahoo (YHOO), where he ran all development initiatives for its search and monetization platforms. He was at Yahoo for a decade.

If Ballmer manages to pull off the hire of Lu–on the heels of already grabbing another top Yahoo search exec, Sean Suchter, which I reported on yesterday–the aggressive exec could almost be bypassing a Yahoo search partnership he has long sought by sucking the talent right out of the place instead.

Ballmer is like Edward in “Twilight,” attracting top-notch search execs to Microsoft’s Redmond HQ, as if they were geek versions of Bella.

Lu would be a different choice for the post than many had expected, with a much more technical background than one in online media or advertising sales.

But since all of Microsoft’s future rests on winning in the search and search advertising space and trying to catch up with its archrival Google (GOOG) from way back in the race, Lu is also well suited for the position.

If Lu takes the job, he will be the boss of three strong digital execs at Microsoft: Satya Nadella, the SVP who heads engineering for Microsoft’s search, portal and advertising platform group; Yusuf Mehdi, whose online services portfolio includes marketing, online audience business development and product management for MSN and the search properties; and Brian McAndrews, the SVP for the advertiser and publisher solutions group.

Lu is known as as solid manager, but he is also called a very nice man and unusually humble for a tech star by many, which could be a good influence on Microsoft.

Before Yahoo, Lu was on the staff of the IBM Almaden Research Center, and worked at both Carnegie Mellon University and Fudan University in China (he also got degrees from both places).

And, in the kind of cred Microsoft likes, Lu holds 20 U.S. patents.

He left Yahoo after becoming dissatisfied with all the turmoil there, quitting in June, without another job lined up.

Since he left Yahoo, there have been rumors that he might be headed to Microsoft, but not in such a prominent job.

There has also been speculation that Lu would take a position at Facebook or even return to China for a tech job.

The well-respected Lu certainly has a multitude of choices, but the chance to lead money-laden Microsoft’s digital efforts–as it suits up for battle with Google–is compelling.

BoomTown has been poking around to try to figure out who Ballmer would choose for the digital head, ever since the man who used to be in charge, Kevin Johnson, quit in July, after the software giant’s takeover bid to buy Yahoo failed.

Several people close to the situation say Microsoft’s Ballmer has been keeping the deliberations close to the vest–perhaps because so many of those he has targeted have declined to consider the job.

But this week, many sources both inside and outside the company have told me that Ballmer is close to announcing his choice.

Annoyingly, one source has decided to play a digital version of “The Da Vinci Code” with me, dribbling out clues–more technical than media, very well liked in Silicon Valley, humble–about the candidate, which he wanted me to solve as if I were Robert Langdon and on the hunt for the progeny of Jesus.

Well, my solution is in: Microsoft’s most promising digital Holy Grail is Lu.

On a related note, bizarrely, the day after this column broke the story about Lu’s leaving Yahoo, I caught him by accident in the background of a video I was doing at a Harvard Business School event honoring Facebook’s Mark Zuckerberg.

You can see him at 4:14 minutes in the video, laughing at me, as I bother Greylock Partners VC David Sze and make a bad pun related to former Yahoo exec Jeff Weiner’s departure from Yahoo.

Here’s that video:

Please see this disclosure related to me and Google.

At least Yahoo got one day of stock euphoria, on the news that its CEO, Jerry Yang, was stepping down, before Microsoft CEO Steve Ballmer dropped yet another bomb on the troubled Internet giant by saying once more with feeling that he is not at all interested in buying it.

Yahoo (YHOO) stock plummeted on the news, dropping below $10 a share to close at $9.14, down $2.41 or an astonishing 21 percent.

While lack of interest in acquiring Yahoo is a sentiment that Ballmer has expressed more times than Alaska Gov. Sarah Palin said “maverick” in the presidential campaign, Wall Street continues to hold out hope that Microsoft might swoop in and make a new takeover bid for all of Yahoo.

It will not. Let’s repeat. It. Will. Not.

Thus, an obviously frustrated Ballmer reiterated his nondesire for Yahoo at Microsoft’s annual shareholders meeting, near its Redmond HQ today.

“We are done with all acquisition discussions with Yahoo,” Ballmer said. “We did our best…we’ve moved on.”

And so should investors, stock analysts and hedge fund vultures, who actually contact BoomTown on a daily basis, asking if when I wrote that Microsoft (MSFT) was not interested in buying Yahoo, I actually meant that it was interested.

Not interested means, well, not interested, except when it comes to those who wish fervently for a pop in Yahoo stock.

But the only way that is going to happen is slowly, as Yahoo rebuilds its much-battered business, brick by brick. And that presumably will happen when a new CEO is selected to run Yahoo.

Lucky for Yahoo, what Ballmer has repeatedly also said is that he was very interested in (and said again today) a search partnership deal with the company.

Microsoft essentially wants to take over that part of Yahoo’s business and will likely give it a pretty penny to do so. For all its troubles, Yahoo remains the No. 2 search player, well behind Google (GOOG), but well ahead of Microsoft.

Microsoft execs think grabbing Yahoo’s business will help it gain on Google–good luck with that, but it gets an A for effort!

And it also hopes another reorganization of its digital businesses will help it do so.

Right now, for example, newly annointed digital exec Yusuf Mehdi is deep in the midst of a restructuring of his division.

Mehdi’s online services portfolio at Microsoft now includes marketing, online audience business development and product management for MSN and the search properties, but divisions and execs are being shifted around.

But the big news, of course, will be the person Ballmer selects to be Mehdi’s boss, as well as the boss for Satya Nadella, the SVP who heads engineering for Microsoft’s search, portal and advertising platform group, and for Brian McAndrews, the SVP for the advertiser and publisher solutions group.

While Ballmer has taken his sweet time in picking someone, after Kevin Johnson left his post overseeing the division in late July, sources inside and outside Microsoft have told me the company is very close to picking a new head.

That would be a good thing since Ballmer has worn out his Rolodex trying–he has been turned down by many, including former Yahoo CEO Dan Rosensweig.

While I am trying to ferret out the current choice, sources said the main candidate is more technically oriented and is well known in Silicon Valley.

Please see this disclosure related to me and Google.

The company has been on the lookout for the person to lead its online efforts ever since the exec formerly in charge, Kevin Johnson, headed out in late July, after the Yahoo takeover bid failed.

At the time, Microsoft CEO Steve Ballmer promised a quick search for a Web leader the software giant has so sorely needed.

But, apparently, quick means not-so-quick at Redmond HQ, where Ballmer has had a few other things to deal with (like the vagaries of Windows Vista!). So, he has cast about for more than three months, both internally and externally, for the person who will turbocharge Microsoft’s Web efforts.

Sources said Ballmer continues to look for an external candidate to save the day, as he has been, preferring an outsider to give the division some spark.

And, while well-known Internet figures like former Yahoo COO Dan Rosensweig, former AOL head Jon Miller and former Facebook exec Owen Van Natta have all taken a pass, Ballmer is soldiering on.

New prospects include former Cisco exec and current Joost CEO Mike Volpi, sources said, with whom Ballmer is likely to be chitty-chatting next.

BoomTown likes that choice, given Volpi has both technical and deal-making skills, and he is someone well-liked in both media and Internet circles. In fact, Volpi has also been a favorite of Yahoo CEO Jerry Yang, who would also dearly love to snag the personable exec.

But Joost, the once-hot online video start-up, has just pushed the restart button with its new flash player, and is hoping to live up to its initial hype, especially in the wake of the success of rival Hulu.

So it is not entirely clear that Volpi would leave at this moment.

Other possible outside digital execs with the right experience are few and far between.

If I was making a list, I would include CBS Digital kingpin Quincy Smith (who probably talks too quickly for Ballmer), as well as Google ad head Tim Armstrong, although both are also unlikely to move from where they are ensconced.

Thus, with so few good choices, it might be that Microsoft (MSFT)–as usual–turns inward.

But even that’s in question, given the prospects of the main internal candidate, Brian McAndrews, who came to Microsoft in its acquisition of aQuantive and runs its online advertising business, seem to have dimmed, sources said. But some caution that McAndrews is not out of the running yet.

The other insider with a chance–Yusuf Mehdi–got the job running MSN and other of Microsoft’s online properties.

He is waiting for the digital uber-boss to lead him, as well as McAndrews and also Satya Nadella, the SVP who heads engineering for Microsoft’s search, portal and advertising platform group.

For now, said one source, that appears to be Ballmer. “He’s going to be the digital chief,” joked one exec. “Until he finds someone he likes just as much.”

In any case, here is a recent interview I did with Volpi in London about Joost’s restart:

For all the noise, it’s worth paying attention, because Monday’s outlook will be cloudy, as in cloud computing.

The day will include a speech from Microsoft’s Chief Software Architect, Ray Ozzie (pictured here), and others on, among other topics, its cloud infrastructure service initiatives–designed to match aggressive efforts from Amazon (AMZN) in the space.

There will also be a demo of Windows 7, which will hopefully put an end to the long Vista nightmare when it is eventually released. (To be ahead of the curve, see a video below of Microsoft’s CEO Steve Ballmer and founder Bill Gates showing Windows 7 off at our sixth D: All Things Digital conference in May.)

In all, a Windows geekfest!

Microsoft (MSFT) execs will probably be in a good mood given the decent earnings results the company announced earlier this week for the third quarter. Revenue was up nine percent to $15 billion, even though net profits only increased 1.9 percent to $4.37 billion.

Still, that was a pretty good performance in a down economy, due to strength in Microsoft’s powerful Windows and Office franchises. And despite–as usual–the weakness of its online division.

While the revenue for its MSN, search and advertising network grew to $770 million, or up 15 percent in the quarter, operating losses doubled to $480 million from $267 in the same period a year ago. Search grew more than display advertising, a forward outlook Microsoft that maintained.

And still no digital chief, long promised by Ballmer, in sight either. Sources said that head, who will lead the unit, has still not been selected. (BoomTown is officially beginning to feel sorry for longtime leading internal candidate Brian McAndrews.)

While PDC has never been an online-focused event–this is for the big-dog businesses of Microsoft–it will still be interesting that the event will focus on continued movement toward the cloud.

It’s an inevitable–though decidedly dicey–journey for the software-dependent behemoth. So, the continued transformation should be interesting to watch.

Here is the Windows 7 demo from D6:

While a lot of analysts and pundits have suggested that Microsoft would or should surely jump into the fray–now that AOL and Yahoo are talking merger more seriously, and especially since Yahoo’s stock has dropped in the $14 range–don’t count on it.

In fact, in what has to be the most Zen-like approach it has ever had, sources close to Microsoft’s thinking actually hope that the talks to combine the Time Warner (TWX) unit and Yahoo (YHOO) will work out.

Why? Because, although some think such a merger would leave Microsoft’s digital aspirations out in the cold–since both AOL and Yahoo are now allied with its archrival Google–the software giant sees the pair coming together as yet another chance to get what it really has wanted all along from Yahoo.

That would be Yahoo’s declining but still significant search business and another shot at AOL’s.

Let’s be clear–Microsoft (MSFT) wants nothing else from Yahoo anymore, according to numerous sources, even though it made a noisy and ultimately failed attempt to buy the Internet giant.

It will not be making another bid, sources said, echoing Microsoft CEO Steve Ballmer’s public and internal pronouncements on not revisiting another Yahoo takeover bid.

But Microsoft is hoping that if Yahoo and AOL merge, the new company will see that its fate lies more in its advertising, content and communications businesses, and not in search.

Microsoft is also figuring that regulators will not allow AOL to continue its search ad partnership with Google, a deal that the software giant lost out on. As part of that deal, Google (GOOG) got a five percent stake in the AOL unit.

But, once AOL is combined with Yahoo, execs at Microsoft hope it will give them the in they have been looking for to reignite failed talks with Yahoo over a search deal that Google also won.

That Yahoo-Google deal to outsource some of its search ads is now being studied by the Justice Department, which is seriously considering blocking it. Microsoft hopes it will founder, which it is more likely to do if Yahoo combines with AOL.

Thus, Microsoft just waits.

It will be interesting to see if this snake-in-the-grass strategy will work for Microsoft, which has yet to come up with an effective online strategy in the consumer space and must still find a digital head.

Ballmer continues to want to nab an outside superstar exec for the daunting job–the names of some former Microsoft execs like Brad Silverberg and Paul Maritz have even been raised internally–much to the chagrin of the leading internal candidate, Brian McAndrews.

Now that appointment is starting to feel like a really complex two-step.

Until it all sorts itself out, what a good opportunity to post this most popular of all online videos–101 million plays!–on YouTube, “The Evolution of the Dance”:

Longtime Microsoft exec Yusuf Mehdi (pictured here) is taking over a big part of Microsoft’s online services portfolio–including marketing, online audience business development and product management for MSN and the search properties.

But Microsoft (MSFT) has yet to name an overall digital head for these online properties, which has been promised by Microsoft CEO Steve Ballmer since the departure of Kevin Johnson in late July.

Mehdi is essentially getting a part of the portfolio of Microsoft SVP Bill Veghte, who will now be primarily focused on Windows and Windows Live business groups.

Mehdi was previously the SVP for strategic partnerships under Johnson.

He is now part of a troika that includes Brian McAndrews, the SVP for the advertiser and publisher solutions group, and Satya Nadella, the SVP who heads engineering for Microsoft’s search, portal and advertising platform group. (Both are pictured here, left to right.)

Who will lead this three-headed beast is still unknown–both Mehdi and McAndrews have been considered the top internal candidates to lead the online properties group, which has been struggling for direction after Microsoft’s failed takeover of Yahoo (YHOO).

Yahoo’s shares have plummeted in recent days, as Wall Street has been hard hit, closing at just below $17 a share today, with a market cap of almost half of what Microsoft’s initial offer was early this year.

To stir things up and catch archrival Google (GOOG), Ballmer has reportedly been trying to recruit a superstar exec from outside the company, including Silicon Valley, to no avail.