• D: All Things Digital, Monday, December 1, 2008 11:15 AM

There was much buzz this weekend as the Times of London reported that Microsoft was preparing to buy Yahoo's search business in a complicated $20 billion deal involving VC investors Jonathan Miller and Ross Levinsohn, but Kara Swisher checks in with her sources, who claim the report is "total fiction." In fact, one of her sources is Levinsohn himself, who said the Times report was the first time he had ever heard of the deal. Microsoft and Yahoo sources said they hadn't heard anything, either.

Meanwhile, though it seems likely that some kind of deal will be worked out between the companies, it should be noted that Yahoo's entire market cap is just $16 billion, which makes a $20 billion search deal sound high. Also, billionaire investor and Yahoo board member Carl Icahn last week significantly upped his stake in the Web giant, a move that would look suspiciously like insider trading if a Yahoo-Microsoft deal was imminent.

That said, Swisher notes that the Times report had "an unusual level of detail" to it -- specifically that Microsoft would give the Levinsohn-Miller management team a $5 billion facility in exchange for the duo raising an additional $5 billion from outside investors, who would be given the right to appoint three of Yahoo's eleven board members. That cash would then be used to buy preferred stock and warrants which would give Microsoft a 30% stake in Yahoo plus a 10-year operating agreement to manage Yahoo's search business. Microsoft would also receive a two-year call option to buy Yahoo's search business for $20 billion, leaving the rest of the company alone to manage its email, messaging and content services divisions.

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