Report: Microsoft, Yahoo talk merger

Shares of Yahoo surged this morning after a newspaper report that Microsoft had asked the online rival to enter formal negotiations about a merger.

The two companies have had held informal discussions in the past, and Yahoo could fetch $50 billion, the New York Post reported, citing banking sources. (Microsoft is the publisher of MSN Money.)

The Wall Street Journal reported after the close, however, that talks between the two companies had ended but that they were still looking into potentially working together in other ways.

Yahoo (YHOO, news, msgs) shares closed up nearly 10% at $30.98 and traded at more than 10 times the average daily volume.

Microsoft (MSFT, news, msgs) shares closed down 1.3% at $30.56, and shares of rival Google (GOOG, news, msgs) lost $2.11, or 0.5%, to close at $471.12.

A Microsoft spokesman said the company does not comment on rumors or speculation. Yahoo representatives were unavailable for comment.

• Video: A Microsoft-Yahoo merger?

Standard & Poor's analyst Scott Kessler sounded skeptical about an actual purchase of Yahoo, writing in a note to clients that an advertising partnership between the two, similar to one that ended last year, would make more sense. But he said he understands "the value of the two companies coming together to compete against a common enemy."

Battling Google

Kessler said Google will likely make a push into video and display advertising through DoubleClick and YouTube, and that investors and traders believe a Microsoft-Yahoo deal would make "a lot of sense because both Microsoft and Yahoo have been losing market share to Google."

The Microsoft-Yahoo report follows Google's $3.1 billion acquisition last month of online advertising firm DoubleClick.

A combined Microsoft-Yahoo "would still trail Google in market share and search advertising . . . but they would be a much bigger threat to Google," Stanford Group analyst Clayton Moran told CNBC this morning. "In terms of their Internet advertising exposure, Microsoft hasn't had much success. They either need to right their own ship or go out and acquire assets."

Now that Microsoft has made Web advertising a priority, Moran said, "they might need to take a drastic action like this."

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Microsoft CEO Steve Ballmer told USA Today on Monday that he regretted not "really understanding the power of advertising as an Internet business model" early enough and said that the company had "underinvested in some opportunities for a while."

Is a deal likely?

The Wall Street Journal reported that the merger talks were in early stages. The newspaper suggested that although Microsoft would prefer buying Yahoo outright, another option would be for Microsoft, which has reportedly been wary of big acquisitions, to spin its online business into a separate company, run by Yahoo, in exchange for a stake in Yahoo. Microsoft has about $26 billion in cash on hand.

Earlier this week, the Post reported that Microsoft was interested in buying 24/7 Real Media (TFSM, news, msgs), an Internet advertising company, to compete with Google.

Reuters gets an offer; AOL gets suitors

Meanwhile, Yahoo wasn't the only media company in play this morning: News company Reuters Group (RTRSY, news, msgs) said it had received a preliminary takeover offer from an unidentified player.

Reuters shares jumped nearly 27% to close at $74.76. Although Reuters did not specify who made the bid, Thomson Financial was the rumored suitor.

"Thomson is the most likely candidate, as the businesses are a good fit," Simon Wallis, an analyst at Collins Stewart in London, told Bloomberg News. "Reuters will also be attractive to private equity, as there is the possibility to boost market share and cut costs."

But any bidder would likely have trouble buying Reuters because of its Reuters Foundation Share, which holds special voting rights to protect journalistic integrity.

And Time Warner's (TWX, news, msgs) America Online division has private-equity firms licking their chops. Time Warner CEO Dick Parsons told CNBC's Maria Bartiromo yesterday that AOL has been approached by interested private-equity players.

Today's flurry of media-merger buzz comes just days after Rupert Murdoch's $5 billion bid for Dow Jones (DJ, news, msgs), the parent of The Wall Street Journal. The Bancroft family, the majority shareholder of Dow Jones, declined to take any action on that bid.

By Elizabeth Strott