Microsoft and Yahoo Finally to Ink the Ad Deal?

Could they finally pull the trigger?

After a tortured year-and-a-half of stop-start negotiations, Microsoft and Yahoo could be getting close to signing a deal to partner in online advertising. Or not.

That’s the gist of an unconfirmed story from the All Things Digital blog, which, citing unnamed sources, reports that a gaggle of Microsoft (NASDAQ: MSFT) executives have trekked down to Sunnyvale, Calif., to put the finishing touches on an ad deal, possibly to be announced as early as next week.

The various iterations of the negotiations between Microsoft and Yahoo (NASDAQ: YHOO) have been the subject of endless speculations and occasional public statements from the companies’ executives dating back to last winter, when Microsoft came out with its unsolicited offer to buy the company outright.

Yahoo refused, and then things got complicated. Lawyers, Carl Icahn, Google (NASDAQ: GOOG) and countless others got involved, and the unfolding soap opera held the tech industry in thrall, for a time.

Microsoft CEO Steve Ballmer has mentioned occasionally that he still believes a deal with Yahoo makes sense, for essentially the same reasons he tried to buy the company last year.

Ballmer has often talked up Microsoft’s determination to compete in Web search, a market he’s referred to as a trillion-dollar opportunity.

But Microsoft has a market share problem. By the latest comScore figures, Microsoft handles just 8.4 percent of U.S. search queries, compared to Yahoo’s 19.6 share and runaway leader Google’s 65 percent stake.

The partnership reportedly under discussion would involve Microsoft buying Yahoo’s search advertising business for billions of dollars up front, and paying out some portion of revenue over time. The deal could also involve a tie-up in display advertising.

Microsoft and Yahoo did not immediately respond to requests for comment.

Various iterations of a search-ad deal were on the table last year, but Yahoo balked at the terms, and talks broke down with both companies accusing each other of negotiating in bad faith.

However, many analysts and commentators, as well as Ballmer, continue to believe that a deal is the best bet for both companies.

“We have suggested for some time that such an alliance would make sense,” Standard & Poor’s analyst Scott Kessler wrote in a research note. “We also think the time might be right to finally consummate a deal, after literally years of discussions.”

Microsoft has been doing its own part to recapture some market share from Google in search. The company launched Bing, its redesigned and rebranded search engine, at the end of May, and has since seen a modest uptick in its share of search queries.

Microsoft is supporting Bing with an extensive ad campaign, and Ballmer recently pledged to spend as much as 10 percent of the company’s operating income on its still-unprofitable search business.