Unless there is some major glitch, there might finally be a search and online advertising deal struck between Yahoo and Microsoft at long last.

Top executives at Microsoft–including SVP of the Online Audience Business Group Yusuf Mehdi, search head Satya Nadella and top digital exec Qi Lu, as well as others–have all flown down to Silicon Valley from their Redmond, Wash., HQ today to iron out the remaining issues, which seem to have to do with the deployment of technology.

“It is an entourage,” joked one exec.

Microsoft CEO Steve Ballmer is also deeply involved in the talks, although he is not with the group.

If all goes well, the deal could be announced within the next week, sources at both companies said.

The most recent talks have been unusually close to the vest at both companies, and spokespeople for both Yahoo (YHOO) and Microsoft (MSFT) declined to comment on the issue.

And, of course, they should not, since there is no certainty any deal will be struck at all, especially since the pair have been down this road before, unsuccessfully.

In those cases, both sides have thought they were close, too, with fingers quickly pointing at each other for the failure of the discussions.

While BoomTown has gotten several different versions of terms of the latest deal, they all include Microsoft (MSFT) paying Yahoo (YHOO) several billion dollars upfront to take over its search advertising business and guarantee certain payments back to Yahoo.

There is also a display advertising element to the deal, which would likely have Yahoo take the lead in selling premium advertising for the companies.

That they are so close is a good sign, although sources on both sides of the deal cautioned that it could just as easily come apart.

And, indeed, Microsoft and Yahoo have long argued the particulars of this deal, including over the rate for traffic-acquisition costs, the ability of Yahoo to have control over data and the simple fact that such an arrangement is exceedingly complex.

But, said one person close to the situation, “It is down to the short strokes, for sure, it is just a question if we can finally close this.”

That’s a good question, given the push-me-pull-you relationship between Yahoo and Microsoft over the last two years.

But both need each other, especially since they lag so far behind search market leader Google (GOOG).

Yahoo was even ready to strike a similar deal with Google in the midst of Microsoft’s hostile takeover attempt last year. That partnership failed due to regulatory concerns.

Talks between Microsoft and Yahoo have waxed and waned too, as I reported earlier this week.

When last we checked in, Yahoo CEO Carol Bartz and Microsoft’s Ballmer had a little private tete-a-tete about the deal, when both were attending the seventh D: All Things Digital conference in Southern California in late May.

Bartz and Ballmer also both acknowledged discussions in onstage interviews at D7, with Bartz even boldly stating that she was open to the deal if good and reliable data and “big boatloads of money” were forthcoming from Ballmer.

(You can see the video of her saying that here, while Ballmer is less colorful here.)

Since then, Microsoft did an aggressive launch of its new Bing search service, which has been an initial success.

The company has become more confident with the early success of Bing, which has garnered good reviews and small improvements in market share in surveys.

Sources at the software giant maintain that the improvement–via innovation and a huge marketing spend–has given Microsoft a bit of leverage against Yahoo, although the bets are still out on exactly how much sustained share Bing can garner.

Yahoo is aware, of course, that is can ill afford to lose search market share, although Bartz has been focused on beefing up Yahoo management and marketing.

Still, the companies have never given up on the talks, which began in March, although all the back and forth underscores a very real debate by both sides about whether joining together will benefit them both or not.

The possible pluses are clear: Huge technology cost-savings and cash for Yahoo and another weapon to fight archrival Google for Microsoft.

It needs as much firepower as it can get. A recent comScore (SCOR) report for June showed Google with a 65 percent share, Yahoo at 19.5 percent and Microsoft at just 8.4 percent.

The deal, if struck, could give a big boost to shares of both companies, which have been up a lot since the beginning of the year.

While sources at both sides stressed that this was in no way a merger, a deal would bind their fates together rather strongly.

There was a report earlier today by 24/7 Wall Street that a deal was “imminent.”

One source advised caution when asked about that word, although this person was more confident than ever.

In any case, if it does not work out, the source said, “this will be it…we will all finally go our separate ways and be done with it.”

Here below are three screenshots of Microsoft’s internal test of a new search product called Kumo.

The long expected upgrade to the Live Search product from Microsoft (MSFT) is being tested for a public rollout later this year.

The blogosphere was a-twitter, literally, after a Twitter post by Powerset co-founder Barney Pell this past weekend, about a rebranding and updating of the search offering. (Microsoft acquired Powerset last year and Pell works on search strategy.)

Sources at Microsoft said the company has not yet decided whether it will keep the Kumo name, which sounds a little too much like that crazy dog from the Stephen King novel.

Maybe that’s the point, at least related to Google. (Chomp!)

In Japanese, actually, Kumo has two definitions–cloud and spider.

Microsoft has been trying to catch up in the search game by spending big-time after it failed to acquire Yahoo (YHOO) last year.

And it still wants to do a search deal with Yahoo, in order to make a dent in the market dominance of Google (GOOG).

Until then, of course, Microsoft must innovate. And, so far, Kumo seems to be an interesting effort with a clean and spare look.

But what do you think? Let me know in the comments.

Also, here is the memo from Microsoft search head Satya Nadella about it, urging all company employees to try it out and send feedback:

From: Satya Nadella
Sent: Monday, March 02, 2009 4:18 PM
To: Microsoft–All Employees (QBDG)
Subject: Announcement: Internal Search Test Experience

The Search team needs you. We’ve been working hard to improve our search service and want to share the progress we are making with you. We are launching a new test program called kumo.com for employees to try and provide feedback. Kumo.com exists only inside the corporate network, and in order to get enough feedback we will be redirecting internal live.com traffic over to the test site in the coming days. Kumo is the codename we have chosen for the internal test.

In spite of the progress made by search engines, 40% of queries go unanswered; half of queries are about searchers returning to previous tasks; and 46% of search sessions are longer than 20 minutes. These and many other learnings suggest that customers often don’t find what they need from search today.

We believe we can provide a better and more useful search experience that helps you not just search but accomplish tasks. During the test, features will vary by country, but you’ll see results organized in a way that saves you more time. An explorer pane on the left side of results pages will give you access to tools that help you with your tasks. Other features like single session history and hover preview help accomplish more in search sessions.

Your Next Search…

To get started, visit kumo.com or click one of the samples below to see how it’s possible to find the right results more easily:

· Audi S8
· Taylor Swift
. Bose Lifestyle 48

You can also set your search defaults to test site using the instructions here.

Your Feedback is Critical

As employees, you are some of our most informed users and our toughest critics, and we highly value your input and feedback to help us build a better service. You have been an important voice in our efforts, and the feedback you’ve sent us since the company meeting has been amazing.

When you visit kumo.com, at the bottom right corner of the each page you’ll see a feedback badge. We ask that each time you use the test site, click the feedback badge and take a moment to answer four quick and simple questions. Feel free to reach out to give us extra feedback directly on our blog and by mailing sfeed. For answers to common questions make sure to see our FAQ.

We are committed to rapid innovation and improvement. Please give the test site a try, rate the results and let us know what you think.

Satya

Here are the three screenshots too (click on the images twice to make them larger):

Taylor Swift

Audi S8

Bose Lifestyle 48

It seems that since Yahoo CEO Carol Bartz is playing it coy about whether she wants to do a massive search deal with Microsoft or not, the software giant is just going to keep hiring her search tech team out from under her.

Today, Microsoft (MSFT) said it had hired Larry Heck, VP of search & advertising sciences at Yahoo Labs, who will work in its online unit.

It’s like the rapture, except geekier.

Said a Microsoft spokeswoman: “We are happy to confirm that Larry Heck has accepted a job at Microsoft. He will be working for Satya Nadella, SVP, research and development, online services division, and he will start in a few weeks time. We look forward to welcoming him to the team.”

[UPDATE: Yahoo sources said Heck was laid off in December, so it is not quite the daring raid that it seems.]

Nonetheless, it is the third big hire from Yahoo’s search tech team by Microsoft. The first was Sean Suchter, followed by Qi Lu, who now heads Microsoft online services team.

Lu is a big draw for search engineers and was close to Heck, and sources said there are several other Yahoo tech execs likely to move too.

The boatloads of money Microsoft has been spending in the arena to catch leader Google is certainly a draw. Microsoft is No. 3 behind both Google (GOOG) and Yahoo (YHOO).

In addition, MSN recently nabbed Yahoo media head Scott Moore to run its U.S. programming, along with Yahoo marketing exec Eric Hadley.

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.

BoomTown loves a good memo and here’s one that two of Microsoft’s top online execs, Yusuf Mehdi and Satya Nadella sent out about the deal the tech giant signed with Dell (DELL) and Verizon (VZ) to distribute its search and other products.

Microsoft (MSFT) is opening its fat wallet to do such a deal and try to best archrival Google (GOOG). It was announced last night at Microsoft CEO Steve Ballmer’s keynote kickoff for the Consumer Electronics Show in Las Vegas.

Here’s the memo:

From: Yusuf Mehdi
Sent: Wednesday, January 07, 2009 6:29 PM
To: OSD R&D FTE World Wide; Online Audience Business Group FTE; APSP FTE–Adv & Pub Solutions Platform
Cc: Yusuf Mehdi; Satya Nadella; Qi Lu
Subject: Announcing Dell and Verizon Strategic Partnerships!

Satya and Yusuf

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, based on sources, BoomTown reported, that Yahoo search exec Sean Suchter was headed to Microsoft.

Now it’s official. Here’s a Microsoft (MSFT) statement on the hiring of Suchter (pictured here), an important tech leader at Yahoo (YHOO), from Satya Nadella, SVP for Search, Portal and Advertising:

“We are very pleased to confirm that Sean Suchter will be joining Microsoft as the GM of our Silicon Valley Search Technology Center, working on Live Search. Sean will report into Harry Shum when he starts work on December 22. We look forward to welcoming him to Microsoft at that time.”

The talent grab from Yahoo is an interesting one, given that Microsoft has also tried to to buy Yahoo’s search and search ad business many times, to little success.

Microsoft CEO Steve Ballmer reiterated that desire yesterday at the software giant’s annual meeting, although he discounted the possibility that Microsoft would rebid for all of Yahoo after it abandoned a takeover attempt earlier this year.

His statement sent Yahoo’s stock further into the basement.

Losing important execs like Suchter, who was the VP of Search Technology at Yahoo, will also not help the company’s prospects. Suchter was deeply involved in Yahoo’s efforts to open up its search platform, initiatives the company has touted aggressively as a bright spot in its not-so-lustrous landscape.

Suchter–who came to Yahoo almost six years ago after it acquired Inktomi (the company that got Yahoo into the search business) in early 2003–has been talking with Microsoft for a while and his leaving was not linked to this week’s announcement that Yahoo CEO Jerry Yang will be stepping down.

But it could be linked to the possibility that another former major Yahoo search exec could also be going to Microsoft. I wrote a post earlier today that I thought the Ballmer was looking at Qi Lu–the well-regarded Search and Advertising Technology group EVP at Yahoo, who left earlier this year–to be its digital head.

All this muscling up in search by Microsoft is troubling for Yahoo. There are big questions, now that Yang is stepping down, whether Yahoo will stay in the search business or sell it off. Yang has been a big proponent of doubling down in search, considering it integral to the entire Yahoo ecosystem.

But others make the very persuasive argument that Yahoo will be increasingly outspent by both Google (GOOG) and Microsoft, in what is turning into a very vicious and expensive arms race.

If it sold off its No. 2 search business to Microsoft–ironically, Yahoo used to deliver Microsoft’s search results–many think it could have huge costs savings and garner guaranteed revenues.

News of Suchter’s departure from Yahoo, including the internal memo announcing it, appeared in Valleywag yesterday.

Please see this disclosure related to me and Google.

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.

Yahoo–which has stuck to its guns by staying in the search business, even though many think it is a losing game and should be sold off to Microsoft–has lost a key engineer in that arena to, uh-oh, Microsoft.

Sean Suchter, the VP of Search Technology at Yahoo, was also deeply involved in Yahoo’s efforts to open up its search platform, initiatives the company has touted aggressively as a bright spot in its not-so-lustrous landscape.

The departure of Suchter–who came to Yahoo (YHOO) almost six years ago after it acquired Inktomi (the company that got Yahoo into the search business) in early 2003–has been in the works for a while and was not linked to this week’s announcement that Yahoo CEO Jerry Yang will be stepping down.

Yahoo confirmed Suchter’s departure, but Microsoft (MSFT) has not yet announced his arrival there.

[UPDATED: Microsoft has now officially announced that Suchter is coming to the company.]

But sources said it will be in late December, with Suchter will be working in search for Satya Nadella, the SVP who heads engineering for Microsoft’s search, portal and advertising platform group.

Sources at Microsoft had told me of that they were close to locking down this impressive get several weeks ago. “If we can get someone like Sean, it says a lot,” said one source.

Indeed, Suchter has been an important tech leader at Yahoo, much as Qi Lu–the well-regarded Search and Advertising Technology group EVP, who left earlier this year–was.

In his LinkedIn profile, Suchter noted about his duties at Yahoo:

“I run Yahoo’s Web search engine, with overall responsibility for its success. This includes engineering, product responsibility, operational stability, results quality, capex spending and revenue (from the paid inclusion program).”

There are big questions, now that Yang is stepping down, whether Yahoo will stay in the search business or sell it off. Yang has been a big proponent of doubling down in search, considering it integral to the entire Yahoo ecosystem.

But others make the very persuasive argument that Yahoo will be increasingly outspent by both Google (GOOG) and Microsoft, in what is turning into a very vicious and expensive arms race.

If it sold off its No. 2 search business to Microsoft–ironically, Yahoo used to deliver Microsoft’s search results–many think it could have huge costs savings and garner guaranteed revenues.

News of Suchter’s departure, including the internal Yahoo memo announcing it, appeared in Valleywag this morning, which speculated that Suchter was headed to Microsoft.

In the memo, Tuoc Luong, Yahoo’s SVP of Search, stated the very obvious about Suchter’s departure:

“Unfortunately, I have to give some bad news to you. Sean Suchter has resigned. Sean’s last day will be December 19th.

Some of you will find this news shocking given that Sean has been a Gibraltar rock at Yahoo and in particular for the Search team. I understand this.”

Interestingly, Yahoo has recently nabbed several of former Microsoft execs, including U.S. ad head Joanne Bradford and U.S. Audience SVP Jeff Dossett.

Please see this disclosure related to me and Google.

[Photo from Flickr stream of WebProNews.]

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: