Microsoft (MSFT) In Talks To Buy Yahoo! (YHOO) Search For $20 Billion?

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Microsoft (MSFT) is well along in talks to control and eventually buy Yahoo!’s (YHOO) search business for $20 billion, according to a report in the Times of London.

AllThingsDigital says no such deal is in the works.

The Times says the boards of both companies have had meetings on the transaction.

If it is a real deal, it would push Yahoo!’s share price back over $20

The UK paper says that the deal would also involve replacing Yahoo!’s management, although Microsoft would not take control of the remaining parts of the portal company. Former AOL CEO Jonathan Miller and former Fox internet chief Ross Levinsohn would run Yahoo!.

If the transaction works, Miller and Levinsohn would have access to enough cash, some of it from Redmond, to eventually buy 30% of Yahoo! and a new board would be elected.

The paper reports that "The talks with Yahoo involve Microsoft obtaining a 10-year operating agreement to manage the search business. It would also receive a two-year call option to buy the search business for $20 billion."

If the arrangement works out, Microsoft would control about 30% of the US search business to Google’s (GOOG) 65%. Microsoft’s expanded search market share should have more leverage in the emerging mobile search market ,which is still in early enough stages that Google may not end up with a dominant position.

Since controlling Yahoo!’s search operation is the only way for Microsoft to make a huge gain in the critical business, it is clearly willing to pay a huge premium. Yahoo!’s market cap is $15 billion.

With such a large portion of Microsoft’s strategic interest involved, the deal is bound to go through.

Douglas A. McIntyre