Updated: Microsoft And Yahoo In ‘Last Ditch’ Negotiations; Yahoo Shares Up; Microsoft Raises Bid

Despite no word of “official” negotiations, it’s clear that the two sides have been in negotiations of some sort for awhile, and now WSJ says Microsoft (NSDQ: MSFT) and Yahoo are in “last ditch” negotiations to reach a friendly deal. It’s not hard to guess what they’re negotiating about: price. And as the report would have it, there’s no guarantee that the negotiations will result in anything. Unofficially, the two sides remain $3-$4 apart. Given Yahoo’s refusal to accept the original offer, every path at Microsoft’s disposal has drawbacks. A raised bid reduces the economic justification for the deal, while a walk leaves Microsoft as a distant online player. And a hostile bid is messy with no guarantee of success. The real question is whether Yang and Ballmer can reach some agreement that allows both to save face, since a compromise would probably require both to go back on some previously made statement. Meanwhile, Yahoo investors are relieved: the stock is up nearly 7 percent in late-day trading.

Staci adds: As important as price is to making the deal stick, let’s not forget another major piece of the puzzle: what actually happens to Yahoo post-merger? That has to be part of any serious discussion and reaching agreement on that also could help make nail things down. Does Yahoo become a wholly owned subsidiary of Microsoft managed only by existing Microsoft execs? Who from Yahoo gets seats on the board (not that it’s really anything but symbolic) and a vice-chairman title or the like? Are Jerry Yang and David Filo supposed to take their money and go home or do they have any real role to play in a post-indie Yahoo?

Update: Microsoft had already signaled unofficially that it was ready to raise its bid, and now it has apparently said that directly to Yahoo (NSDQ: YHOO). NYT reports that it has raised its bid by “several dollars”, although the exact amount is not known. The report adds that major Yahoo shareholders have been getting calls from the companies in an effort to figure out what price they’re really looking for.

More to come