WiMAX's Backers Bet Big, Dream Bigger

Microsoft said on Sunday it has proposed an alternative deal to Yahoo, rather than a full acquisition, in a move that could save the Web pioneer from fighting a proxy battle with financier Carl Icahn.

"Microsoft is considering and has raised with Yahoo (NASDAQ:YHOO) an alternative that would involve a transaction with Yahoo but not an acquisition of all of Yahoo," the company said in a statement without clarifying what that alternative might be.

Microsoft (NASDAQ:MSFT) emphasized it was not proposing to make a new bid to buy all of Yahoo "but reserves the right to reconsider that alternative" depending on discussions with Yahoo, shareholders of Yahoo or Microsoft, or other third parties.

A source familiar with Microsoft's thinking said Yahoo was responsive to Microsoft's latest proposal but emphasized that discussions between the two companies may not result in a deal.

The New York Times reported that Microsoft and Yahoo may form a partnership or joint venture for search-related advertising to take on Google, which dominates the search market with a share significantly larger than a combined Yahoo and Microsoft.

For its part, Yahoo continues to talk with Google about a search advertising partnership and a deal could come as early as this week, a source familiar with the talks said on Thursday.

The statement from Microsoft comes on the heels of a proxy campaign launched on Thursday by Icahn to replace Yahoo's board with directors who would reopen talks with Microsoft, saying Yahoo had acted irrationally in refusing the giant software company's $47.5 billion bid.