• Silicon Alley Insider, Monday, May 19, 2008 11:15 AM

Microsoft on Sunday issued a statement indicating an openness to return to the bargaining table with Yahoo, even though the software giant walked away from negotiations to acquire the company less than two weeks ago. This time, Microsoft says it favors a smaller-scale deal rather than an outright acquisition, though it doesn't discount the possibility of either outcome.

Sources tell Kara Swisher that Yahoo's search ad business is Microsoft's primary concern, as the combination would make for a credible No. 2 competitor to Google in the search business. Microsoft could either purchase Yahoo Search or enter a deal to be its exclusive partner. Such a deal would allow Yahoo to keep its online display business, its communications assets and its content properties, areas which Swisher says Yahoo should have stayed focused on in the first place, instead of branching out into search.

As Silicon Alley Insider's Henry Blodget says, this would be a good deal for Yahoo, because the Web giant will continue ceding search share to Google no matter what, so it may as well get some money for its technology. However, Microsoft is ultimately chasing "a lost cause," says Blodget, seeing as neither Yahoo nor Microsoft can maintain search share against Google, let alone gain it. You have to wonder why Microsoft is so hell bent on beating Google in search-a game that most analysts agree is effectively over.

Read the whole story at Silicon Alley Insider »