On Sunday, Microsoft management thrilled the punters with an announcement that new discussions with Yahoo were taking place concerning an arrangement rather less sweeping than the failed acquisition attempt they gave up on two weeks ago:
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.
Speculation abounds as to what the "alternative" is, but given that even at the height of the acquisition fever Microsoft seemed to be primarily interested in Yahoo’s search ad business, some sort of arrangement for Microsoft to monetize the Yahoo Search eyeballs has to be the top candidate.
A search ad deal certainly is more attractive than a complete acquisition of Yahoo with the messy overlaps in the content side of the business. Microsoft wants more eyeballs for its search ads and Yahoo has been having execution problems making money off their search ads so why not? Still, it’s a deal born of both the would-be partners’ desperation in competing with Google in the search and search ad business and is hardly a panacea for either.