Microsoft remains a software company at its core, albeit one trying to evolve and compete with Google as people perform more tasks over the Internet. Its Internet division is unprofitable.
Yahoo, which depends on Internet ads, is closer to Google in temperament but far behind it in execution.
A combination "is in the long-term interests of both companies," Valencia said.
Growing impatient, Microsoft had threatened to nominate a slate of Yahoo directors and ask investors to oust the board if no agreement was reached by last Saturday. As that date neared Microsoft feinted again, saying it might walk away, which would send Yahoo shares tumbling.
But Microsoft later left open a small door in the rhetoric, declaring that it would consider its options unless "significant progress" had been made by the deadline.
Against that backdrop, the two sides informally discussed figures between $31 and $40 a share.
"Clearly, Microsoft was bluffing about the ultimatum," a major Yahoo investor said. "Their next best option is worse than Yahoo's next best option -- their next best option is slow death, and Yahoo's next best option is a Google deal and an AOL deal."
On Thursday morning, Microsoft CEO Steve Ballmer told a major gathering of employees that the company could gain a big piece of the online ad market without Yahoo.
"Yahoo is not a strategy, it's a part of a strategy," Ballmer said, according to a transcript. "We're willing to pay for that at some level, and beyond that level we're not willing to pay for it."
But he acknowledged that Microsoft's technology needed momentum, and that Yahoo's customers and advertisers would provide that.
"I know exactly what I think Yahoo is worth to me, exactly," Ballmer said, implying to anyone who read the widely distributed speech that the figure was above $31 a share. "I won't go a dime above, and I will go to what I think it's worth if that gets the deal done."
Talks began to heat up that afternoon.
"Everyone checked around more with their shareholders, and it seems like that encouraged coming to a compromise," said a person briefed on the effort.
As Yahoo's board met Friday, people familiar with the talks between the two companies said the most likely compromise was a per-share price in the mid-$30s.
A determining issue might be just how successful Yahoo was with a recent two-week test in which Google sold some ads next to Yahoo's search results. That test has drawn scrutiny from antitrust regulators.
--
joseph.menn@latimes.com
--
jessica.guynn@latimes.com
--
Menn reported from Los Angeles, Guynn from San Francisco.
--
(BEGIN TEXT OF INFOBOX)
At a glance
Yahoo Inc.
Headquarters: Sunnyvale, Calif.
Chief Executive: Jerry Yang
Employees: 14,300 (2007)
2007 revenue: $6.97 billion
Products: Online services including e-mail, news, sports, instant messaging, search and advertising
Microsoft Corp.
Headquarters: Redmond, Wash.
CEO: Steven A. Ballmer
Employees: 79,000
2007 revenue: $51.12 billion
Products: Software including Windows operating system and Office productivity suite. Xbox video game console. Online services including e-mail, news, sports, instant messaging, search and advertising.
Sources: Gale Group, IAC, Company Intelligence, Datamonitor
