Microsoft: We don't have to buy Yahoo outright; Is it joint venture time?

Updated with Yahoo response, more on potential search deal:Microsoft on Sunday issued a statement that opens the door to a partnership with Yahoo, but not an acquisition.

Now Microsoft is talking some sense (Techmeme).

The 20-second version of this Microhoo drama so far. Microsoft bids for Yahoo. Yahoo tells Microsoft to get lost. They talk. Microsoft walks. Yahoo dangles in the wind. Billionaire Carl Icahn launches a proxy war with an alternate slate.

All that back and forth and some sort of joint venture or side deal may have been the solution the entire time. That's my read on the following Microsoft missive:

"In light of developments since the withdrawal of the Microsoft proposal to acquire Yahoo! Inc., Microsoft announced that it is continuing to explore and pursue its alternatives to improve and expand its online services and advertising business. Microsoft is considering and has raised with Yahoo! an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo! Microsoft is not proposing to make a new bid to acquire all of Yahoo! at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties. There of course can be no assurance that any transaction will result from these discussions."

Key excerpt: Microsoft is considering and has raised with Yahoo! an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo!

How would this work? Microsoft could give Yahoo its MSN properties to run for a share of the company. Or it's a joint venture. Or Microsoft buys Yahoo's search business and throws in some sort of exclusive two- to three-year technology deal. Or it's any combination of those options that would allow Microsoft to focus on its core businesses while reaping some of the online advertising bounty.

Will it happen? It's possible. Yahoo has shareholder issues. Microsoft's time could be better spent elsewhere. Everyone would be happy. Except for Icahn.

Update: News.com has an email from Kevin Johnson outlining Microsoft's new online strategy, revealed in an Ina Fried report May 7. From the letter:

Four pillars have formed the basis of our strategy: 1. Consolidate ad platform and win in display 2. Innovate and disrupt in search 3. Deliver end-to-end user experiences across PC, phone, and web 4. Reinvent portal and social media experiences We have many options that support acceleration of our strategy. As announced earlier today, we are also considering new alternatives for a transaction with Yahoo! which do not involve a full acquisition. At this time, we have not made a new bid to acquire all of Yahoo!, but we reserve the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo!, shareholders of Yahoo! or Microsoft, or with other third parties.

Regardless of the outcome of any new discussions, it is important that we continue to move forward to strengthen our online services business. The fact is that we are not where we want to be in this business yet and we've been in this position longer than we'd all like. To that end, we will be accelerating elements of our core strategy, and breaking ground in new areas.

Meanwhile, the New York Times is reporting that Microsoft's proposal to Yahoo revolves around search advertising and joining forces to better compete with Google. In other words, this overture may be Microsoft's Hail Mary pass to prevent a Yahoo-Google search deal. The search sale possibility was reported first by Kara Swisher. The big question is whether Yahoo would sell its search business or just team up with Microsoft. You could argue that it would make sense for Yahoo to essentially sell it's search market share to Microsoft. Yahoo could then focus on what it does best. The decision matrix is also relatively simple. Will selling Yahoo's search business to Microsoft net more dollars than outsourcing search to Google? Weighing those options may indicate that it is better to sell the search business to Microsoft.

To wit:

• If Yahoo sold its search efforts to Microsoft it would get some return on its previous investment.
• If Yahoo outsources to Google Yahoo's search investment will just wither.
• In either case, Yahoo could use this Microsoft possibility as a way to get better terms from Google--assuming those outsourcing talks are still on.

Update 2: Yahoo has responded. In a statement the company said:

"Yahoo! has confirmed with Microsoft that it is not interested in pursuing an acquisition of all of Yahoo! at this time. Yahoo! and its Board of Directors continue to consider a number of value maximizing strategic alternatives for Yahoo!, and we remain open to pursuing any transaction which is in the best interest of our stockholders. Yahoo!'s Board of Directors will evaluate each of our alternatives, including any Microsoft proposal, consistent with its fiduciary duties, with a focus on maximizing stockholder value."