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Update: Microsoft, Yahoo Said To Be Hammering Out $20 Billion Search Buyout; Denied

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Microsoft (NSDQ: MSFT) is working out a deal that would ultimately net it Yahoo’s search business for $20 billion, The Times Online reports, but has been denied outright by parties involved. If it turns out to be true, it would be complex deal with many moving parts:

— MSFT would initially only invest $5 billion, with the option to buy out the new unit for $20 billion after two years. Yahoo (NSDQ: YHOO) would continue to run its own email, messaging, display and content services businesses in the event of a buyout.

— Velocity Investment Group founders Jonathan Miller and Ross Levinsohn would likely lead the new search division; and they’d match MSFT’s funding with $5 billion from external investors.

— The new unit would end up with a 30 percent stake in Yahoo, and the external investors would have the right to appoint three of Yahoo’s 11 board directors.

Senior execs at both MSFT and Yahoo have reportedly agreed on some of the terms, but the deal hasn’t been finalized — and may not be approved at all, The Times’ sources say. Now would be an opportune time to hammer out the details: Yahoo’s stock has been battered and the company is essentially functioning sans executive leadership since Jerry Yang stepped down as CEO two weeks ago.

Outspoken investor Carl Icahn has helped lift Yahoo’s stock prices in the past week, increasing his stake in the company by about 7 million shares, and BoomTown’s Kara Swisher suggested it was a sign that Yahoo’s board was close to naming a new CEO. But perhaps the promise of this new search deal — if it’s really being discussed — is what sparked Icahn’s confidence.

Update: Levinsohn says that the Times’ story isn’t true, per VentureBeat:

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