Microsoft-Yahoo talks driven by specter of Icahn, Google

To pressure Yahoo into reviving the talks, he has nominated an alternate slate of 10 directors scheduled to stand for election at Yahoo's July 3 annual meeting. Icahn didn't respond to a request for comment Monday.

Meanwhile, Microsoft's unwillingness to pay more than $33 per share created an opportunity for its nemesis, Google Inc., to enter an advertising partnership with Yahoo.

"It's becoming pretty clear that Yahoo is either going to work something out with Microsoft or do a deal with Google," said Standard & Poor's equity analyst Scott Kessler. "If Yahoo winds up with Google after all this, it would be pretty damaging to Microsoft."

Microsoft began pursuing a Yahoo takeover in late January largely as a means to counter Google's dominance of the Internet search and advertising markets.

After Microsoft pounced, Yahoo became more receptive to an idea that it had resisted in the past -allowing Google to show some of the ads alongside Yahoo's search results.

A two-week trial last month demonstrated Google's technology could help boost Yahoo's profits, and the two sides began exploring a long-term alliance. But any partnership between Google and Yahoo likely would face antitrust obstacles because the two companies control more than 80 percent of the U.S. search advertising market.

A similar deal between Yahoo and Microsoft wouldn't pose the same antitrust problems because Google still would control more than half the market.

"We believe that a core issue for Microsoft is to acquire Yahoo on friendly terms," UBS analyst Benjamin Schachter wrote in a Monday research note. "A near-term deal (in search) could act as an intermediate step that would go a long way toward testing the waters."

Just buying Yahoo's search operations might cost Microsoft about $21 billion, Collins Stewart analyst Sandeep Aggarwal estimated in a Monday research note. He values Yahoo's display advertising operations at $14 billion and its international holdings at $9.25 billion.

Yahoo Chief Executive Jerry Yang believes the Sunnyvale-based company is on the verge of a turnaround that will prove it's worth more $50 billion. Starting next year, he has promised Yahoo's net revenue will increase by 25 percent annually -more than doubling its recent rate of growth.