• Silicon Alley Insider , Monday, May 19, 2008 11:30 AM

Henry Blodget piggybacks on the latest scoop from All Things Digital's Kara Swisher regarding the latest Microhoo developments. Sources said that the two parties were discussing a search outsourcing deal--not unlike the one Yahoo has been pursuing with Google--and Blodget argues that it would still be a step in the wrong direction for them both.

"We were encouraged when we heard that Microsoft (MSFT) and Yahoo (YHOO) are now talking about an 'alternative transaction,'" Blodget says. "We thought that, finally, the companies might be discussing a combination we think would be smart: Microsoft spinning its Internet operations and $10 billion into Yahoo in exchange for 51% of the stock."

But after separating fact from fiction, Blodget found that such a deal wasn't on the table. The software giant's intention is to "possibly" have its own ads running alongside Yahoo search results--though both companies have said that they're still pursuing multiple options. Still, Blodget says his team is dumfounded by the search-centric plans.

"We don't understand why Microsoft is so obsessed with competing with Google in search," he said. "But until we see some evidence that Microsoft or Yahoo can so much [as] maintain query share, let alone gain it, we're going to regard all efforts in this direction as a lost cause."

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