The Redmond, Wash.-based software maker disclosed the revived discussions Sunday without providing any specifics about the nature of the deal being explored except to say it involved bolstering the companies' position in the online search and advertising markets.
"There of course can be no assurance that any transaction will result from these discussions," the statement said.
In a statement late Sunday, Yahoo said its board is exploring several "value maximizing" alternatives and "remain open to pursuing any transaction which is in the best interest of our stockholders."
Microsoft emphasized that it hasn't resurrected a $47.5 billion takeover bid that its chief executive, Steve Ballmer, withdrew May 3 after Yahoo CEO Jerry Yang
-- acting on behalf of Yahoo's board -- demanded an additional $5.5 billion.
But Microsoft left open the possibility that it might dangle another buyout offer of Yahoo, depending on how the discussions progress between the two companies and their respective shareholders.
Yahoo is facing intense pressure from its shareholders to reopen sales negotiations, with activist investor Carl Icahn threatening to replace the Sunnyvale-based company's entire board unless a deal can be working out before Yahoo's July 3 annual meeting.
Although Microsoft hasn't been in touch with Icahn yet, the software maker reached out to Yahoo after the billionaire revealed his plans Thursday to lead a shareholder mutiny, according to two people familiar with the current status of the discussions. These people requested anonymity because they aren't authorized to speak on behalf of the companies.
Microsoft's latest talks with Yahoo could be aimed at providing an alternative to a search advertising partnership that Yahoo has been exploring with Google as part of its attempts to remain independent.
Last month, Yahoo completed a two-week test that allowed Google to use its superior technology to sell ads alongside a sliver of Yahoo's search results. Since then, the two rivals have been mulling a long-term alliance that would likely raise antitrust concerns because the two companies combined control more than 80 percent of the U.S. search advertising market.
While Google's help probably would provide Yahoo with a short-term lift, it might hurt Yahoo in the long run by making Google even stronger, according to some analysts.
Ballmer already has said Microsoft will be less interested in Yahoo if it cedes control of search advertising to Google. Icahn has urged Yahoo's board not to enter into any deals, such as a Google partnership, that might diminish the company's value to Microsoft.
Nevertheless, some analysts believe a formal partnership between Google and Yahoo could happen any day.
The mere acknowledgment that Microsoft and Yahoo are at least talking again will likely cause more investors to conclude it's only a matter of time before the two sides work out an amicable deal.
The theory that Microsoft would eventually renew its takeover attempt helped cushion the blow to Yahoo's stock since Ballmer withdrew an oral offer of $47.5 billion, or $33 per share, after Yang held out for $53 billion, or $37 per share.
Yahoo shares ended last week at $27.66, down by just $1, or 3 percent, since Ballmer walked away from the discussions. They were trading at $19.18 when Microsoft announced its initial bid of $31 per share Feb. 1.
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Despite the intensifying pressure from Icahn and some of Yahoo's major shareholders, Yang and Yahoo Chairman Roy Bostock reiterated last week that they won't sell the company for less than the board believes it's worth.
While Yahoo's board has set a $37-per-share target, many analysts believe Microsoft could probably seal a deal by offering $34 or $35 per share.
Most analysts believe Microsoft needs to make a dramatic move, such as buying Yahoo, to slow Google's rapid rise as the Internet reshapes the way people interact with computers. The shift is weakening Microsoft's core franchise of providing software tethered to the individual hard drives of personal computers.
"We continue to maintain our view that there is no other company that needs Yahoo as much as Microsoft and Microsoft does not have compelling plan-B without Yahoo," Collins Stewart analyst Sandeep Aggarwal wrote in a research note last week.
Although it still ranks as technology's richest company, Microsoft's Internet expansion efforts have been largely ineffectual. Since the end of the company's fiscal 2005, Microsoft's online operations have lost $1.5 billion.
"The fact is that we are not where we want to be in this business yet and we've been in this position longer than we'd all like," Kevin Johnson, the head of Microsoft's online division, wrote in a Sunday e-mail to employees. Even if Microsoft can't work out a deal with Yahoo, Johnson assured "we will be accelerating elements of our core strategy, and breaking ground in new areas."
Microsoft's latest advances in Internet advertising and search will be outlined in a conference this week, Johnson said.
Once the Internet's kingpin, Yahoo was overtaken by the more nimble and innovative Google several years ago. With Yahoo's profits shrinking and revenue growth decelerating, Yahoo lost about half its market value
-- more than $25 billion -- in the two-year period leading up to Microsoft's initial bid.
Yang, a Yahoo founder who became CEO 11 months ago, maintains the company is on the cusp of a turnaround that will boost net revenue by at least 25 percent in 2009 and 2010. That would be a dramatic improvement from the company's recent net revenue gains of about 12 percent.
Microsoft first broached the possibility of forming a business alliance with Yahoo in late 2006, according to a letter that Ballmer released in February. In early 2007, Microsoft offered to buy Yahoo for about $40 per share, according to a person familiar with those discussions. The person didn't want to be identified because that bid was never publicly disclosed.
[Associated Press; By MICHAEL LIEDTKE and JESSICA MINTZ]
AP Technology Writer Jessica Mintz reported from Seattle.
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