The improbable report of a new Microsoft-Yahoo deal

A report in Sunday’s Times of London outlining a convoluted deal that would see Microsoft acquiring Yahoo’s search business at a $20 billion valuation was quickly met with a healthy dose of skepticism from vigilant tech observers who have been watching the two companies negotiate at arm’s length for the past 10 months.

The story, which did not name sources, said the two companies were in talks over a transaction that would see Microsoft take control of Yahoo’s search business under the aegis of a management team led by former AOL CEO Jonathan Miller and Ross Levinsohn, former president of Fox Interactive Media.

Microsoft would invest $5 billion into the management team, which Miller and Levinsohn would match through external investment. Microsoft would enter into a 10-year agreement to manage the search business, with a two-year call option to buy it outright for $20 billion.

That seemed to many a staggering sum given that Microsoft offered to take over the search business for $1 billion earlier this summer, when Yahoo’s market capitalization was more than twice its current value.

Yahoo’s stock has been in free fall since mid-year, as talks with Microsoft — first about a complete acquisition, then a deal limited to search — fell through, and regulatory scrutiny squashed an ad partnership with Google.

As of this writing, Yahoo’s market cap stood at $14.89 billion.

And Microsoft was prepared to pay $20 billion just for search? Seems improbable, particularly given the rapid debunking Kara Swisher at AllThingsD handed the story as Levinsohn went on record to say it was the first he’d heard of it, and that no one from the Times had contacted him.

That the two companies would be discussing a deal (or warming up to it) is eminently plausible. And cash-flush Microsoft has proven time and again that it is not averse to offering generous deal premiums. (The original offer to buy all of Yahoo, made public Feb.1, represented a 62 percent premium to Yahoo’s value at the time.)

But now isn’t then, and Yahoo has done precious little to convince investors that it has the vision to execute the turnaround they have been noisily clamoring for. The company is currently focused on the search for a successor to Jerry Yang as chief executive.

So with newly minted board member Carl Icahn buying up large a large volume of Yahoo shares and publicly advocating a search deal with Microsoft, deal talks don’t seem too far off.

Here’s laying odds that the final transaction, assuming one is reached, will take a different form than what the Times outlined.

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