Business - MS says Yahoo ad deal still makes sense

By Franklin Paul

NEW YORK (Reuters) - Microsoft Corp Chief Executive Steve Ballmer said a Web search advertising deal with Yahoo Inc makes economic sense and may still be possible, though the two sides are not in any discussions.

Shares of Yahoo jumped as much as 17 percent as investors hoped Ballmer's comments could lead to the two sides returning to the negotiating table. But gains were pared back to about 12 percent after Microsoft issued a statement saying it had no interest in buying Yahoo.

Talks between the two broke off in July after Yahoo rejected Microsoft's proposal to buy its search advertising business and enact a revenue-sharing partnership.

Yahoo had also rebuffed in May a full acquisition bid from Microsoft that was priced at $33 per share, or $47.5 billion. Instead, Yahoo signed a search advertising pact with Web leader Google Inc, which is being scrutinized by regulators.

"Perhaps there will continue to remain opportunities to partner around search," Ballmer told a Gartner Inc conference in Orlando, Florida.

"We are not in any discussions with them. We'll see. They want to remain independent. There are probably still opportunities around search. I think it would still make sense economically for their shareholders and ours."

Since talks broke off, Yahoo shares have plunged to a 5-1/2-year low of $11.37, weighed by concerns over the outlook for Web display advertising, as major advertisers such as banks and automakers cut back spending.

"We offered 33 bucks not too long ago and it's 11 and a half. So I don't know what price might have got the job done," Ballmer said, responding to a question from Gartner analyst David Smith on whether Microsoft might take another stab at buying Yahoo now that its stock price is so low.

"It's clear that Yahoo did not want to sell the company. It did not want to sell when we offered 33 ... They probably think it's worth at least 33 today."

Yahoo declined comment. Its shares rose to as high as $13.73 on Thursday, before settling at around $13.16 in late trading on the Nasdaq.

"Our position hasn't changed. Microsoft has no interest in acquiring Yahoo; there are no discussions between the companies," a spokesman for Microsoft said in a statement.

Microsoft shares were up 3.6 percent at $23.48.

Despite the market's excitement, any pursuit of new talks would be impeded by several issues, including Yahoo's severely depressed stock price and the poor outlook for the advertising market due to the weak economy, analysts said.

"The larger issue is strategic fit," Cross Research analyst Richard Williams said. "Microsoft clearly has spent money and changed its focus to 'build' rather than 'buy.'

He added that for businesses driven by advertising, such as Microsoft and Yahoo's Internet operations, it is the wrong time for a deal with markets reeling and consumer confidence plummeting.

"Going into a recession is about the worst time to buy an advertising firm," Williams said. "It's hard to know how hard they are going to be hit and how low they are going to go."

(Additional reporting by Anupreeta Das in New York and Jim Finkle in Boston)