Another Try for a Microsoft and Yahoo Deal

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Yahoo probably wouldn't want such a deal to continue indefinitely, since if the arrangement allowed Yahoo to invest in and strengthen other parts of its business, it would want to retain the ability to take back control of search in the future—or at least play Microsoft off Google. A deal for Google to place ads on Yahoo search results imploded last summer, abandoned by Google when it was faced with the threat of an antitrust lawsuit by the Justice Dept.

Shareholder Pressure

For all those reasons, a Yahoo-Microsoft deal could take some time to work out. What may make it happen this time is that the two companies more than ever need each other to compete with Google, whose share of Internet searches remains as high as 72%—and whose share of search advertising revenues likely tops 80%. With search slowing and Yahoo and Microsoft continuing to lose ground to Google, shareholder pressure on the two companies to find common ground seems sure to rise.

Meanwhile, Yahoo faces the potential loss of search market share in the coming year and a half as its agreement with Hewlett-Packard (HPQ) and Acer to promote its browser toolbar expire. Because Yahoo is the default search engine on those toolbars, the end of those deals could eliminate some search traffic to Yahoo.

Microsoft, on the other hand, has hired a number of Yahoo search executives and engineers, including Qi Lu, now head of all of the Redmond (Wash.) company's online businesses. And it's preparing for a summer launch of a major new version of its search engine.

Stocks didn't trade Apr. 10, Good Friday, so it's not yet known what shareholders think of the new development. Whatever the particulars of any deal, they're less likely than last year's acquisition talks to get leaked until they're pretty much wrapped up. "I said this to Mr. Ballmer: I'm not going to negotiate with my 50,000 favorite friends," said Bartz recently: "We are going to negotiate as companies negotiate, and that is privately." But apparently not as privately as she would like.

Hof is BusinessWeek's Silicon Valley bureau chief.