Summary:

Yahoo (NSDQ: YHOO) shareholders rue the day when merger talks between the company and Microsoft (NSDQ: MSFT) broke down three years ago, but…

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Yahoo (NSDQ: YHOO) shareholders rue the day when merger talks between the company and Microsoft (NSDQ: MSFT) broke down three years ago, but according to a Reuters report, based on unidentified sources, it looks like they may have another chance at realizing a combination. It’s not clear how far along the talk of bidding has gone for Yahoo, but Reuters (NYSE: TRI) places Microsoft’s name as a potential buyer alongside other firms looking to buy pieces of Yahoo’s business or the whole company.

Among the companies said to considering some sort of bid for Yahoo are Providence Equity Partners, Hellman & Friedman and Silver Lake Partners, as well as Chinese e-commerce giant Alibaba and Russian technology investment firm DST Global. For over a year, a number of reports have been circulating about possible bidders, including AOL, though that company has shot down the rumors.

While ex-CEO Carol Bartz often had to deny that she was shopping Yahoo around, she frequently said that had she been in charge during the last serious talks with Microsoft, she would have taken the deal.

Microsoft had offered as much as $33 a share for Yahoo. The company’s stock has generally traded at around $15, though the Microsoft news has appeared to boost the stock to nearly $16 by late afternoon on Wednesday.

A combination between Microsoft and Yahoo would certainly make life much more difficult for their vulnerable portal rival AOL (NYSE: AOL). The tie-up would probably not make much of a dent in the rising display share being taken by Google (NSDQ: GOOG) and Facebook, as advertisers have placed more value on the scale and engagement, which tends to be more easily targeted than anything the portals can provide. Given the wide reach of both Microsoft and Yahoo independently, a singular entity would already come with a great degree of demographic overlap.

Still, as both struggle against trends that favor their rivals, merging still seems like the only viable answer to declining market share.

In the spring of ’08, talks broke down over the gap between what Microsoft was willing to offer and what Yahoo was willing to accept. Microsoft wouldn’t offer more than $33 a share — which valued Yahoo at roughly $47 billion, after initially bidding $41 billion that February. In the end, Yahoo’s founder Jerry Yang wouldn’t take less than $37 per share.

After all that, Yahoo eventually handed over control of its search results to Microsoft’s Bing, a process that was completed with the assumption of the portal’s European search business in August.

If it does pursue a serious proposal for Yahoo, Microsoft will have some advantages in competing against private equity firms to make the acquisition. The volatility on Wall St. the past few months have made financing of large transactions particularly challenging, despite record-low interest rates. Most of the speculation has companies buying pieces of Yahoo, rather than the entire entity.

In the meantime, this is still the beginning of the sale process, as Reuters noted that Yahoo’s advisers, Goldman Sachs and Allen & Co., have yet to send financial papers to the prospective bidders.

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