Microsoft announced on Sunday afternoon that it has issued another proposal to Yahoo, calling for a transaction that would not involve the acquisition of all of Yahoo's assets.
The announcement comes just days after billionaire investor Carl Icahn launched a proxy fight to unseat Yahoo's current board at the internet search pioneer's upcoming annual shareholders' meeting on 3 July.
Icahn, a major Yahoo stakeholder, aimed to pressure the search company to restart talks with Microsoft, after the software giant withdrew its unsolicited buyout bid of $33 (£17) a share on 3 May.
While Microsoft has repeatedly claimed to have "moved on" following the withdrawal of its Yahoo bid, the software giant is still faced with the issue of how to bolster its internet business to compete against chief rival Google. Yahoo faced the ire of its major shareholders after deal talks failed.
"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 said in a statement.
"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," the software giant stated.
Microsoft noted that there is no guarantee anything may come from these discussions.
The software maker declined to comment beyond the contents of its statement.
However, according to reports in The New York Times and The Wall Street Journal, Microsoft proposed an arrangement in which it would sell advertisements that would be displayed next to Yahoo search results, in an effort to fight back competition from Google.
"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-maximising strategic alternatives for Yahoo, and we remain open to pursuing any transaction which is in the best interest of our stockholders," Yahoo said in a statement.
The internet search pioneer added: "Yahoo's board of directors will evaluate each of our alternatives, including any Microsoft proposal, consistent with its fiduciary duties, with a focus on maximising stockholder value."
The timing of Microsoft's proposal comes as Yahoo gears up to announce a transaction with Google — possibly as early as this week — which will see Yahoo using Google search ads.
Such a deal is undesirable for Microsoft, which stated, when it withdrew its buyout bid, that it would forgo a hostile bid for Yahoo in the hope it would not prompt the web search pioneer to run into the arms of Google.
If Yahoo does hook up with Google, Microsoft, at that point, may consider it has nothing to lose by bolstering Icahn's proxy fight, making a new bid and taking it directly to Yahoo shareholders. That move would give Icahn's proxy fight real teeth, in that investors would know that, if they vote for Icahn's slate, they would, in essence, be voting for a merger of the companies.
Despite the recent resumption of talks between the companies, Icahn and Microsoft have had no contact, according to people familiar with the talks.
Icahn, according to a Reuters report, may find anything less than an outright buyout unacceptable.
"He does not want to see Yahoo pushed into some joint venture with Microsoft and is not going to be used to push Yahoo into it," according to Reuters, which cited a source familiar with Icahn's thinking. "The best thing for Yahoo shareholders is for Microsoft to buy Yahoo... If not, Icahn would ally with Yahoo in doing a deal with Google over Microsoft."
If Microsoft and Yahoo strike a deal to carve up the web search pioneer, Microsoft would probably be most interested in Yahoo's search and advertising offerings, given that area is where the software giant has struggled to take the lead.
In addressing Microsoft's statement regarding Yahoo and its future plans, Kevin Johnson, Windows and Windows Live chief, said on Sunday in a letter to employees: "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."
Microsoft's search strategy will be unveiled on Wednesday during the company's annual advertising conference, advance08. That strategy includes expanding capabilities in new types of vertical search and improvements in the overall relevance of search queries. For example, Microsoft will beef up its shopping-specific search tools and is making improvements to its algorithmic search.
