Yahoo meets with Microsoft to avert hostile takeover

Microsoft, which had been threatening to abandon a bid now valued at about $42 billion, instead offered to pay billions of dollars more for the company, those people said. The sweetened bid brought Yahoo, a reluctant seller, to the bargaining table to see whether it could hammer out an agreement that would combine two of the world's largest Internet companies.

The two appeared late Friday to be on pace to reach a deal over the weekend, the people said, but they warned that talks could still fall apart. Yahoo plans to continue negotiating an alternative arrangement with Time Warner Inc. that would let the Internet pioneer remain an independent company, as its top executives prefer.

The first serious talks between Yahoo and Microsoft marked a dramatic change in tone after three months of sniping.

"Everybody -- shareholders, management alike -- is getting more reasonable. All of a sudden it seems like something is going to happen," said one person briefed on the negotiations. Like others involved in the drama, he asked not to be named because the discussions were confidential.

Both companies declined to comment, as did Time Warner.

Yahoo and Microsoft are powerhouses in such advertising-supported online services as Web-based e-mail and instant messaging. But they lag far behind Google in the most profitable one: Web search.

Since announcing its unsolicited bid Feb. 1, Microsoft has said it preferred to reach a friendly acquisition deal with Sunnyvale, Calif.-based Yahoo. But Redmond, Wash.-based Microsoft had threatened in recent weeks to turn the bid hostile by seeking to take control of Yahoo's board of directors.

Yahoo investors had long predicted a raised price and an amicable deal, and they were relieved to see that prospect come closer to fruition. They sent the company's shares up $1.86, or 7%, to $28.67 on Friday. Microsoft shares fell 16 cents, or 0.5%, to $29.24.

"It has been a foregone conclusion on Wall Street that this is a deal that is going to get done," said analyst Anthony Valencia of Trust Co. of the West, which owns Yahoo shares. "While there have been some delays, it's clear that the parties are moving closer and closer together."