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.

Following on BoomTown’s report earlier this week, The Wall Street Journal followed by also naming former Autodesk top exec Carol Bartz as a contender for Yahoo CEO in a report today.

Since my post on Wednesday, I have been getting a lot of intense reaction from inside and outside of Yahoo to the idea of an old-line tech CEO–such as Bartz (pictured here in a lovely WSJ dot drawing)–with little Internet or online advertising experience, taking on the difficult role at Yahoo (YHOO).

Bartz certainly has a rock solid resume, including a computer science degree–exactly of the kind the Yahoo board has been interested in, as I have previously reported.

She successfully led Autodesk (ADSK)–which makes computer-aided design software and is half Yahoo’s size–for 14 years, before retiring in 2006 to spend more time with her family.

Bartz remains Autodesk’s executive chairman and also serves on big-name tech boards, such as Intel (INTC) and Cisco (CSCO).

What’s most interesting about the reaction to Bartz is that the kudos and the knocks track very closely.

Some think her lack of Internet and online ad experience is a problem, while others think it is a good thing, freeing her to think freshly.

Some worry about her age (60 years old), while others see it as important to get a seasoned pro in the seat.

Most controversially, some are concerned about her closeness to Yahoo CEO Jerry Yang and President Sue Decker–Bartz serves on the Cisco board with Yang and the Intel board with Decker–seeing the choice as an attempt by Yang to stay in power at Yahoo.

But others think it will make for a smoother transition and that Yahoo still needs Yang’s involvement, despite his rocky tenure as CEO.

Consider the wildly different opinions on the idea of an exec like Bartz:

“It is unbelievable to me that there are NO Web monetization experts being considered for Yahoo CEO–the fix is easy–just focus on making money!!” said one former Yahoo exec.

Added another person close to Yahoo: “I don’t see how Bartz is qualified, other than as a successful former CEO. CAD software is very different from Yahoo’s technology and she has no apparent background in ad sales.”

But others disagree.

“Yahoo needs a strong executive like Bartz to get the company on track, and all she needs is to be able to focus, make deals and be decisive,” said a Yahoo insider. “And she is plenty tough enough to do it and has the tech chops too.”

In addition, another former Yahoo exec noted that she could easily be paired with a strong No. 2, with much more of an Internet background.

“There are a lot of great choices around who would love to take a COO job, since it is clear Bartz will not be a long-term CEO,” said the former exec, referring to her age. “It is a perfect stepping stone.”

But the Yang connection worried one current exec: “Jerry just does not want to let go. The person who made this mess should not be controlling a search to replace himself, especially with someone who is probably friendly to him.”

Indeed, several sources said the most prominent insider considered, board member John Chapple, is now not a choice, due to his closeness to fellow director Carl Icahn. Icahn came to the Yahoo board after waging an ugly proxy fight against the company and Yang.

But other current exec disagrees. “Yahoo has had enough turmoil and we need someone who can come in and settle things down,” said the exec. “Bartz seems perfect to do that.”

Another exec points out that Yang has not apparently been favoring Decker (pictured here), to whom he is very loyal, but who carries the same baggage as Yang about Yahoo’s current state.

“That Sue is not the likely choice is a sign that Jerry has tried to make the best choice for the company over getting an ally in power,” said the exec. “I think he also knows the reaction to her as CEO would probably send Wall Street into a tizzy and signal investors of an unwillingness to be accountable or to change by the already tarnished board.”

Whoever the new leaders of Yahoo are, they will have their work cut out for them, from deciding the strategy, especially with regard to a search deal with Microsoft (MSFT), to determining whether a merger deal with Time Warner (TWX) online unit AOL should happen.

While rich in assets and online traffic, Yahoo has suffered over the last year from a range of internal and external troubles that have shaken the iconic Web company to its core and depressed its stock.

That’s why Yahoo’s board probably must select a new CEO before it reports fourth-quarter earnings on Jan. 27.

If not, it will have to answer sharp questions from investors, Wall Street analysts and the press about why the process is taking so long, especially considering the urgency.

That sluggishness, of course, is a hallmark of Yahoo, and one of the reasons for its current troubles. Yang announced he would be stepping down in mid-November.

This one is about the most underrated and overrated in tech–and somehow I manage to call Facebook both. I also note that while Steve Jobs is not overrated, by any means–so back off, you Mac fanatics–the other key execs at Apple (AAPL) are underrated.

Worst investor? Not even close: The winner is Carl Icahn, who has taken a very long and very cold bath investing in Yahoo (YHOO). Let’s hope he knows something we don’t for 2009.

Here are the other Tech Ticker interview videos I posted yesterday, on what I would give tech execs for the holidays and my likely inaccurate predictions for 2009.

Here’s the latest video:

There it was again–like the gnarly ghost of Christmas past–in the Los Angeles Times this week. But this time Lloyd Braun wasn’t going to take it anymore.

The object of his ire was dropped right in the middle of a blog post on how Yahoo was “reversing its Hollywoodification” with–egads–no more reserved parking spaces for top execs at its Santa Monica offices.

The Times said the new rule “signals a stark new era of austerity that overshadows the elimination of the last vestiges of the corporate culture war spurred by the hiring of former Warner Bros. chieftain Terry Semel and ABC’s Braun.”

Knock, knock, L.A. Times! Because that war is actually still raging at Yahoo (YHOO)–although the parking spaces carry little symbolic weight anymore at the company, which has much bigger problems to solve these days.

But even more unusually, the piece also abruptly dropped in old allegations the newspaper had included in a devastating story in November of 2005 by Chris Gaither about Braun and Yahoo’s media push at the time, titled “Can Yahoo Sign on to Hollywood?”

It was noted in the post as an aside:

(Braun also converted a conference room with a patio into his personal office and requested a corporate jet for the Santa Monica office. Oh, and there was the time he reportedly took an umbrella without paying for it from the Yahoo store on a rainy day and then asked the clerk who requested payment: ‘Do you know who I am?’ He later explained that he just wanted to make sure the clerk knew he was good for it. But we digress).”

Digress is right, because it turns out, the bulk of those juicy anecdotes about him in the new blog post and the old story actually don’t check out, after extensive reporting BoomTown had done previously and this week too, talking to a range of key execs at the company at the time.

Thus, when I saw the Times post this week, I contacted Braun (pictured here) and sent him the link. He quickly responded via email:

“I am not an umbrella thief–and I promise I never will be. I never once asked for a corporate jet. I was and continue to be a big fan of Southwest Airlines. And I certainly never engaged in any kind of office construction while at Yahoo.”

Braun–who now runs his own online and traditional media production company called BermanBraun in L.A. with Gail Berman–also said he had immediately asked the Times for a correction of the blog post, as he says he did three years ago when the original story ran.

Times Business editor Sallie Hofmeister, whom I also contacted (but who was not in charge at the time of the 2005 piece), said the Times was looking into the situation and wrote in an email to me:

“The story we published in 2005 was a reflection of the sentiments within Yahoo at the time. We worked very closely with Yahoo on the story, so the company’s top management had every opportunity to challenge our reporting. After the story ran three years ago, neither Yahoo nor Lloyd requested a correction and no correction ran. What you hear from people today probably would be different than what they would have said three years ago. Lloyd is long gone and so are the tensions of entertainment’s invasion at Yahoo. People’s recollections also change. Enemies then are friends today.

“As for blog post, we strive for accuracy and when people in our stories take issue with our coverage, we take them very seriously.”

So do I.

Thus, it is long past time to set the record straight and put to bed a fable of raging Hollywood high-handedness–with too-good-to-be-true-because-they’re-not, clichéd lines like, “Do you know who I am?” and filched umbrellas.

Why bother looking into it at all these years hence? Well, for one, it is just not fair for inaccuracies about Braun to remain, complete with a never-die life on the Web and a nagging perception that he was some digital version of Ari Gold from “Entourage.”

But, more importantly, the struggles at Yahoo back then have everything to do with what is going on now. And that is a company culture at war with itself about what it is and should be.

I have, in fact, been collecting string on Braun’s alleged escapades for years, mostly from Yahoos. I was fascinated since, like a game of telephone gone awry, those who worked with Braun closely and would know, told a different story from some of those in Sunnyvale, who might not.

That did not stop many there from telling various stories about Braun, almost none of which were accurate when I actually followed up.

Because of that, I started to look very closely at Yahoo to figure out why such fallacies went unchecked about him and later, about an ever longer string of departed execs.

But let’s start with what was clearly true in that 2005 piece, which began with another parking kerfuffle and a hissy-fit email from a new Yahoo exec, recruited from Fox, threatening to tow “someone” who parked in his assigned place.

It was a classic opening, trying to show in an anecdote the clash that was going on at Yahoo at the time.

And it was an apt one. There was indeed a lot of resistance to the decision by then-CEO Terry Semel, who was pushing Yahoo as a media company.

To do it, Semel hired Braun–a highly successful Hollywood figure (think being key to initiating and developing “Lost,” “Desperate Housewives” and “Grey’s Anatomy,” and you have a good idea of his stature)–to pull it off at a big new and splashy office complex in Santa Monica.

Thus, the lines were drawn by some at Yahoo HQ, where execs mostly work in cubicles and where a we’re-all-equal ethos prevailed among some of the techie old guard especially, at least in their skewed perceptions of themselves.

(Guess what? They do work in cubicles, but some Yahoos in Sunnyvale are more equal than others.)

Still, back in 2005, it was easy to make an ebullient, brash and sometimes abrasive entertainment exec like Braun into a tidy little caricature and mock the idea of his task.

And who was hired to make new and innovative kinds of online programming hits, much as Braun had on television so well.

There is no doubt there were tensions. The Times story began focusing on the level of distrust, which in my estimation–I also was watching Yahoo closely at the time–was mostly from the tech side and mostly without interface with those in Los Angeles.

But, as Gaither noted correctly:

Yahoo’s ability to blend the cultures, milking each for what it does best, will be key to reaching its ultimate goal: to build on its success as the most visited destination on the Web by leveraging the links between content and the technology used to create and deliver it.”

Unfortunately, the Times story then launched into a series of really broad clichés about Hollywood versus Silicon Valley, using the typical “conspicuously expensive car” in LaLaLand versus the “energy-saving” one in Geekville.

(Again, my experience is that the tech folks always seem to have Porsches too, much as many Hollywood slickies drive Prius hybrids.)

The story went on to talk about the arrival of Semel, whom Gaither reported was seen as not as Hollywood at first as was expected by some wary Yahoos. He then got to Braun, who apparently was.

That’s where the problems come in, first by making it seem as if Braun was responsible for the pricey lease for the new Santa Monica offices at the Colorado Center.

Actually, according to top execs like Dan Rosensweig–Braun’s direct boss–as well as sources close to Semel and many other execs involved, that facility’s planning was directed largely from Sunnyvale, as most such projects are.

Braun did give an interview when the lease was announced, but was in no way the driver of the building’s renovation, which was actually being done by the company Yahoo rented the space from.

Next, came an assertion that the execs in Santa Monica got “Hollywood-style perks,” pointing out that Braun had “converted a conference room with a patio into his personal office. He also reserved a parking space close to the elevators for his car.”

Well, Braun did have a reserved space, which was no real crime to my mind, and which was actually not particularly close to the elevators.

How do I know? I have walked Braun to his car in the parking garage, which is about as nonluxurious as it gets, as opposed to Yahoo HQ, which used valets.

More importantly, Braun converted no office space and was assigned a temporary office elsewhere during the renovation, according to a panoply of execs and workers at Yahoo, such as Rosensweig, Jeff Weiner, Scott Moore and sources close to Semel.

It was a good office–after all, Braun was the boss of the Media Group.

And while both offices did have patios, the large outdoor spaces were also kind of dingy, especially compared to the manicured lawns of Yahoo HQ. And the patios were accessible to many parts of the floors, as I noticed on my many visits.

(As an added note, after the renovations were complete, Braun’s official office was not by any means fancy and was very standard in its drone-like look.)

The worst part was the next line: “Yahoo’s top executives drew the line when Braun asked for a corporate jet,” which was followed by a stunning quote by Semel.

It read:

The reaction was basically, ‘No,’ said Semel, who does not ask Yahoo to foot the bill when he flies to Northern California in his own private plane. ‘A lot of the more traditional media companies are doing their best to scale back on some of the perks and put the investment into the products and the consumers.’”

But, top Yahoo execs have uniformly told me over the years and this week that such a request from Braun never happened.

What was actually occurring, again directed by Yahoo’s Sunnyvale HQ, was an analysis about whether the company should start a charter air shuttle for the many engineers in its Burbank facility, working on its then-Panama search project, and employees at its growing Santa Monica facility.

There could be up to 20 workers going back and forth north daily, and the Southwest Airline bills were getting high.

Thus, a look-see to determine if an L.A.-Sunnyvale shuttle for everyone was needed. But it was conceived as a less-than-high-end plane, essentially a puddle-jumper that left at 7 a.m. and came back at 7 p.m.

Braun thought it was a good idea to examine and told Rosensweig, who was in charge of looking at the charter idea. But Braun was not part of the consideration of it.

Ultimately, Semel nixed the idea as too costly, and Braun did not object.

Why Semel seemed to tell Gaither that is curious. But a person familiar with Semel’s thinking said he was only referring to an company shuttle for everyone and not a corporate jet just for Braun and his minions, as the story opaquely implied.

“The discussions over the charter had nothing to do with Lloyd,” said the person. “And he did not ever ask for a corporate jet ever.”

Rosensweig, Weiner and several other top execs at the highest echelons–many of whom did not get along with Braun–support this version, on the record.

“I never saw anything out of the ordinary or Lloyd playing by Hollywood standards,” said Vince Broady, who worked for Braun, after being brought to Yahoo by Rosensweig. “I mean, Lloyd is a colorful character, which makes people notice him, but the idea that he was more difficult than anyone else was overblown.”

There is no doubt why Braun would attract attention–he is very noticeable and had a long and bruising career in Hollywood, with lots of stories of his dishing it out. He’s a genuine character, indeed, but not really that unusual compared to others in the entertainment sector, except perhaps to some at Yahoo.

Thus, I have no doubt, though, that such a story went around that Braun did desire a jet of his own and that Gaither heard it told, just like this most incredible of anecdotes in the piece.

The infamous umbrella!

Here is what Gaither wrote:

Braun’s long career in Hollywood has led to some awkward moments and misunderstandings inside Yahoo–and provided gossipy fodder for critics eager to cast him as a technically illiterate egomaniac.

According to one widely recounted tale, on a rainy day Braun took an umbrella from the Yahoo merchandise store without paying for it. Then, when asked for payment, he reportedly berated the store clerk, asking, ‘Do you know who I am?’ In fact, Braun’s representatives say, it was an innocent question to ensure that the clerk knew he was good for the money.

A Yahoo spokeswoman said the umbrella ultimately ended up in a pool of umbrellas available to all employees.”

I could not, obviously, find the clerk to whom Braun allegedly said this. But I can say that there are free baskets of umbrellas for staffers all over Yahoo, and top execs like Braun can also buy them at company stores and just use their names as part of an account system.

And while I have no proof, the use of such a clearly hoary Hollywood phrase–“Do you know who I am?”–seems like it was simply made up to me by critics bent on making it a much better story than it was.

To be fair, Gaither does portray it as a “tale” that was circulating around Yahoo. But that probably should have alerted him that it was a very tall one indeed and not very reliable–a kind of digital urban legend rather than an actual event.

That’s why I would not have used it, without a much more explicit explanation that it was more an example of the tensions at Yahoo between the media and tech units than it was reality.

Perhaps worst of all was the impact of the piece, which forever cemented Braun’s reputation as a Hollywood-gone-wild exec.

Most interesting was that, according to both the Times and Yahoo sources, the company complained about the tone of the piece, but never asked for a correction.

Why? Sources familiar with Semel’s thinking said that he and PR execs thought it would cause more attention to focus on Braun, if they contested the piece, and it was better to just let it go.

It was probably a bad decision, given it was in the L.A. Times, which had a lot of credibility.

And, indeed, the high-profile Braun was later slapped silly by Valleywag, as the Times piece kept circulating within Yahoo. By the next year, Braun became one of the gossip blog’s first targets.

Valley–which knows a good character when it sees one and likes to poke and prod many, many such Silicon Valley-linked figures in mocking glee (with varying levels of accuracy)–even had a countdown to when Braun would be fired.

Because of this kind of thing, Braun said he tried to get Gaither to take another look at the stories about him, and met with Times editors to get them to make corrections.

The Times said Braun never formally asked for a correction and instead just complained about the story. To me, that is the same thing, but I am not privy to the Times’s internal corrections process, and Hofmeister declined to elaborate.

In any case, looking back, Braun told me this week the lack of support from Semel and Yahoo to fight the story was hugely disappointing and was the moment he realized he felt he would probably have to leave Yahoo.

Eventually, the feeling was mutual, as tensions escalated even further after the article appeared.

Braun–who had a particularly rocky relationship with Rosensweig, which is now patched up–was eventually pushed out in late 2006, after Yahoo moved away from its media focus to drill down in search.

That turned out to be a bad move, as Yahoo got its head handed to it by Google in search efforts. And it has since seriously been in tailspin in the wake of a series of jarring events.

Those include: the sudden departure of Semel mid-2007; the appointment of Co-Founder Jerry Yang as CEO; a painful public struggle to redefine Yahoo; a botched takeover fight with Microsoft (MSFT); a messy proxy battle with Carl Icahn; a collapsed search partnership with Google (GOOG); a decimated stock price; a scarily declining graphical advertising market; wrenching layoffs; and the stepping down of Yang and the thus-far uncompleted search for a new CEO.

You get the idea.

More importantly, with the cutting off of its more vaunted media aspirations, Yahoo closed the door on possible innovative directions that could have made it more competitive now, as it continues to struggle to define itself.

One of Yahoo’s great strengths–and it still is–has been its content properties, which are the most popular, by and large, on the Web. Instead, stinging from the article and the fallout of it, the company retreated from pushing forward aggressively in media.

Had it not, I can imagine a host of stuff it might have done.

And, ironically, Braun is now working on an online project with Microsoft, a celebrity site that will debut early next year and use a lots of the concepts he worked on at Yahoo.

In the 2005 piece, Gaither quoted Yahoo exec Jeff Weiner as saying, in a Yin-Yang concept: “We’re often asked, “Is Yahoo a media company or a tech company?”

Sadly, that question never got resolved then and still has not today.

It almost makes one nostalgic for stolen umbrellas, controversial parking places, questionable patios and wrangling over corporate jets.

Almost.

BoomTown, who never met a Yahoo story I didn’t like to write up, is handing over the stage today to hyperactive entrepreneur Mark Cuban, who just weighed in on what Yahoo should do.

Literally, his post yesterday on his Blog Maverick site is titled “What Yahoo Should Do,” and he lays waste to a lot of the conventional wisdom about the Internet portal’s fate.

Cuban and Yahoo have a rocky history. Yahoo bought his company, Broadcast.com, in the Web 1.0 boom in 1999 for $5.7 billion in stock, which Cuban promptly sold at the peak.

Since then, he’s used the billions he garnered to conduct the longest-running I-told-you-so in the digital industry, including being on the alternate board when Carl Icahn was waging a proxy fight against Yahoo (YHOO) earlier this year.

(Full disclosure: Cuban has recently also gotten into a tussle with the SEC recently.)

Let’s just say, Yahoo CEO Jerry Yang is not a fan. Ironically, in the piece, Cuban seems to be a big fan of Yahoo, or–more precisely–of its potential.

First, Cuban discounts any purchase of Yahoo’s search business by Microsoft (MSFT)–sorry, Carl. And not because Yahoo does not want to sell, but because he thinks the software giant will not waste its cash horde, as it gears up to fight Google (GOOG).

“Why anyone thinks that Microsoft is stupid enough to give up what amounts to most, if not all of their liquidity is beyond me. Particularly when their net current assets have now fallen a little below Google’s. Between liquid assets and borrowing capacity, both have about the same amount of ‘powder’ in place in the event ‘the next big thing’ appears on the radar. I doubt either wants to be at a disadvantage to the other when it comes to potential opportunities.”

Next, calling Yahoo’s directors and large shareholders the “Huggy Bear contingent,” after that classic cliché of a character on the “Starsky & Hutch” television show, he advises against “trying to dress up Yahoo in order to pimp it out to any bidder it can find.”

Instead, in a very clear strategic explanation, Cuban advises that Yahoo become an aggressive buyer of traffic, services, content and monetization.

Given so much is on sale at a huge discount, Cuban posits that Yahoo should make 20 or more acquisitions in the next 18 months:

“Yahoo should be on the warpath, vetting each and every media (yes, media) and technology company it can sit down with looking for bargains.

“It should be taking Yahoo stock and finding every and any accretive investment in the Internet and media space that it possibly can. Some may argue that Yahoo stock is too cheap to use for acquisitions. I beg to differ. The speculation around a potential Microsoft acquisition, along with a very strong balance sheet has propped up its stock. Compared to private and public would be targets, Yahoo stock is amazingly strong currency.”

I like Cuban’s moxie–I always do–especially given he seems to be able to articulate a clear vision in his piece of what Yahoo could be, much better than its leadership.

“Yahoo has the opportunity to be the ultimate next generation media company,” write Cuban, quite correctly. “It just has to stop being afraid of its own shadow.”

Amen to that.

BoomTown really does hope that in some secret airport hangar right now Microsoft CEO Steve Ballmer and Yahoo CEO Jerry Yang are meeting, in order to hammer out a fair search deal that will benefit them both.

I’d even insist that Yahoo’s noisiest board member, activist shareholder Carl Icahn, be there too, to make sure all sides were copacetic and there would be no last-minute switcheroos and backstabbings.

Because, long ago in galaxy far, far away, what is now going on between Microsoft (MSFT) and Yahoo (YHOO) would have seemed inane.

I am talking about this past January, of course, when the idea of the pair doing some kind of partnership together to fight off the aggressive march of Google (GOOG) would have been been easy to imagine and perhaps even to pull off by the pair of star-crossed tech companies.

Instead, they have been bickering and puffing their insufficient-to-the-task chests out at each other to little true effect. Meanwhile, back at the organic ranch, Google racks up more share of the search market by the minute and aims to do the same in mobile and video.

And while everyone is suffering in this economic meltdown, including Google, it’s clear that it’s better to be ready to rumble when it inevitably ends than it is to be still dithering over a deal that seems also inevitable but never seems to take shape.

The latest development in the story has been Microsoft’s hiring of a well-regarded former Yahoo search and online monetization star named Qi Lu. It was a great get by Microsoft, coming after another recent important hire of another Yahoo search exec, Sean Suchter.

And there are more to come, many sources tell me, as Microsoft puts the pressure on Yahoo by sucking the talent right out of the place.

Not a bad idea, especially if Microsoft is intent on spending big-time to strengthen its online bench to battle Google.

While he grabbed talent, Ballmer extended a bit of a wilted olive branch to Yahoo in an interview with The Wall Street Journal after the Lu hiring (thanks for nothing, Frank!).

Said Ballmer:

We’re fully prepared to compete without any partnership with Yahoo. We don’t need to act. Would it be advantageous for both of us to make a deal? Look, the fundamental basis for doing the search deal with Yahoo has to do with critical mass in the advertising marketplace. It doesn’t have to do with technology, or any of these other things, it really is a market phenomenon. Together we would have more advertisers….which means we’d have more relevant ads on our page. We’d have higher monetization levels possible in front of us because there would be more people bidding on more key words. Most importantly, Google would have perhaps a real credible competitor sooner.”

And the hiring if Lu and Suchter would surely help in an integration, as Ballmer also said in the Journal interview.

Microsoft needs all the muscle it can get because its money-losing efforts so far have not added up to much in the way of share or innovative influence. (And no, I will not ever admit Live Search Cashback is innovative or massively effective.)

The problem is that buying talent is just a tactic–a nice bit of thuggish mugging Microsoft has long been so adept at, to be sure–as one way to force Yahoo into a deal.

But it is not a strategy and in the end, does not give Microsoft what it needs, which is a serious stake in the game. By that, I mean real share, from 20 to 30 percent.

One person close to the situation said it perfectly to me recently: “Microsoft can hire every Yahoo engineer in the place and that still wouldn’t mean it would get to the kind of market share it needs to have to truly compete.”

Ballmer, of course, is now apparently in one of his famously stubborn moods, telling many people (who have recounted his sentiments to me) that he has tried and tried again, does not know who at Yahoo has the power to get a deal done and that he will only do a deal when Yahoo comes to Microsoft ready to go.

He is right about the first two. As to the third, I am perplexed why he would wait even a second and is instead–for once in his life–acting patient. Again, it kind of makes sense tactically, I guess, to drive a better deal.

But, if it is to work well and be a long-term successful partnership, Microsoft has to give Yahoo a decent deal anyway, right?

And what happened to the Ballmer who scared me a little bit when he almost jumped out of his seat at his most recent appearance at the sixth D: All Things conference, loudly declaring that Microsoft keeps “coming and coming and COMING!!!”

Where’d that guy go?

Instead you get this waiting-to-be-asked-to-the-prom stuff from Ballmer in the Journal interview:

I think good ideas are usually better done quickly than slowly, so it would probably be better for both us, and certainly for Yahoo, if we were to do it sooner than later. But at the end of the day, that would have [to] be something Yahoo would be as interested in as I have expressed our interest.”

As for Yahoo, I am not sure what to say, except its options are running out fast.

While its efforts at innovating search are promising–Yahoo’s BOSS (Build Your Own Search Service) this week showed nice traction, with 10 million queries a day for the customized search products–it is still not enough in the face of Google’s power and Microsoft’s financial heft.

But, according to sources and also several people Yang and Yahoo Chairman Roy Bostock have spoken to recently, there is still a debate among directors as to whether a search sale or partnership with Microsoft should be struck.

I think that’s why Icahn has been so mouthy of late in the press about the importance of doing a search deal. If it were all lined up and ready to go, he’d be as silent as a church mouse.

“Carl likes to agitate any way he can and now that he is a director, he has to be more careful,” said one person who knows him well. “This talking it up is his way of trying to push it through, since he still does not have board support.”

According to numerous sources, in fact, Yahoo leadership is worried about the leverage it would have in doing a deal with Microsoft, and some think a merger with AOL needs to be completed first.

Actually, if Yahoo did manage to do a search deal of almost any kind with Microsoft first, the impact would surely lift its stock–even now–and give it the valuation needed to complete the AOL deal.

That’s definitely the feeling now at AOL owner Time Warner (TWX), said many sources, which dearly would prefer that Yahoo strike a Microsoft search deal first, get its stock closer to a decent level, appoint a new Yahoo CEO and deliver a clearer idea of its path before Time Warner commits to selling its online assets to Yahoo.

“Yahoo has trouble making decisions,” said one source there, who acknowledges AOL’s own weaknesses readily. “So we’re not entirely confident in placing our fate with them.”

Indeed, clarity is always a preferred state, and many I talked to think that getting there would be easier than either Yahoo or Microsoft thinks.

“It really could be done quickly if they would only stop plotting all the chess moves and do something,” said one source. “This is not a game.”

No, it is definitely not, because a game is supposed to be fun, and watching this unfold is anything but that.

It’s not even a game, according to Ballmer in the Journal interview, at the very end.

Tellingly, he compared the struggle with Yahoo to an old cliché of a story about outrunning a bear (it used to be an AOL exec favorite too, so I know it well):

I don’t know if you know the old story about the two guys out in the woods who see a bear, and one guy says, boy, we’d better really run fast, or that bear is going to get us. We’ve got to run faster than the bear does. And the other guy says, no, I’ve just got to run faster than you do. In this economy, maybe that’s the right way to think about it.”

Years ago, Ballmer said almost exactly the same thing to me and others present about distant No. 3 Microsoft not necessarily having to catch No. 1 (Google) if it could chase and knock off No. 2 (Yahoo) and grab that spot instead.

Strap on your sneakers, Yahoo.

Please see this disclosure related to me and Google.