By Eric Auchard and Kenneth Li
SAN FRANCISCO/NEW YORK (Reuters) - MICROSOFT (MSFT.NQ)Corp
The media companies have included Time Warner Inc
Shares of Yahoo jumped as much as 9 percent earlier in the day, after the Wall Street Journal reported that Microsoft, positioning for a new run for Yahoo's search business, had in recent days approached media companies to join together on a deal that would effectively lead to Yahoo's breakup.
However, the Reuters source and a CNBC report, citing unnamed sources, later said there were no new talks or negotiations.
The Journal also reported Microsoft had met with activist investor Carl Icahn in recent days to encourage him to press his proxy battle for control of Yahoo's board, the first sign Microsoft welcomed his month-old campaign. This development also was attributed to unnamed sources familiar with the talks.
Icahn was not available to comment on the report.
Microsoft, Yahoo, Time Warner and News Corp all declined comment.
Wall Street analysts said the latest news revived flagging hopes among some investors that Microsoft was still interested in doing a deal with Yahoo. "The hopes that Microsoft would come back were getting crushed over the last 10 trading days," Collins Stewart analyst Sandeep Aggarwal said.
Yahoo stock ended the day up 3.4 percent at $20.88. The stock had traded as low as $19.58 on Tuesday, near its level in late January before Microsoft made its unsolicited takeover bid for Yahoo, sending the stock above $30 in mid-February.
Microsoft shares fell 3.7 percent to $25.88 on Wednesday. In the prior day's trading, Microsoft fell to two-year lows of $23.19, intraday, before recovering.
Analyst Youssef Squali of Jefferies & Co said the sharp Yahoo stock reaction was most likely a defensive move by short-sellers seeking to cover bets a Microsoft deal was off.
"Even the rumor that Microsoft is getting interested again is enough to have people to want to cover their bets against Yahoo stock," Squali said, adding that many investors have shorted Yahoo from the high $20s all the way down below $20.
Options investors placed fresh bets that Yahoo would be trading up to $27.50 by October, analyst Rebecca Engmann Darst of Interactive Brokers Group said.
THE WAITING GAME
Several financial analysts said a key detail in the Journal report was that Microsoft and Yahoo executives had sought to revisit the merger on May 17 -- two weeks after Microsoft walked away -- and that two Yahoo board members in the meeting had said they would settle for a merger worth $33-$34 a share.
On May 3, Yahoo rejected a $33-a-share Microsoft offer worth $47.5 billion, and earlier this week questioned whether the software maker was ever serious about a full-scale merger.
The source familiar with Microsoft's thinking confirmed that Yahoo had belatedly sought a deal in mid-May worth $33 to $34, but that Microsoft was no longer interested at that point.
The source said Microsoft executives considered the early May deadline as vital to winning regulatory approval before the end of the year -- when a new presidential administration arrives and months more delays would likely occur.
Microsoft had also become convinced that Yahoo executives were passively resisting the deal and unwilling to seriously negotiate. Meanwhile, the economy has taken a toll on the online advertising market, and with it the value of buying Yahoo.
"Microsoft is going to let Icahn do the dirty work and hand Yahoo over to them," Jefferies & Co's Squali said, adding that it was in Microsoft's interest to hang back and let Yahoo shares settle lower as investors quit betting on a takeover premium.
In the long run, however, Microsoft needs Yahoo more than Yahoo needs Microsoft, he argued.
"Microsoft has a gaping hole in its strategy and it's called the Internet and it's only getting worse because Google is encroaching on Microsoft's business," Squali said.
Separately, the U.S. Justice Department is pursuing a formal antitrust investigation into a deal reached last month between Yahoo and Microsoft-archrival Google Inc
Google, with more than 60 percent of the Web search market, and Yahoo, with 16.6 percent, agreed to a deal for Google to run search ads on Yahoo's site in a partnership that could mean $250 million to $450 million in new cash flow for Yahoo.
Google said it was confident the deal would enhance overall industry competition, but declined to discuss the probe.
(Additional reporting by Ajay Kamalakaran in Bangalore, Franklin Paul in New York and Doris Frankel in Chicago; Editing by Derek Caney, Leslie Gevirtz, Gary Hill)