Icahn, Microsoft Revive Hope for Yahoo! Deal

Updated from 11:16 a.m. EDT

SAN FRANCISCO -- Billionaire investor Carl Icahn continued his push for a Microsoft(MSFT Quote)/Yahoo!(YHOO Quote) merger, revealing on Monday that he has been in talks for the past week with Microsoft CEO Steve Ballmer, who expressed an interest in opening discussions with a new Yahoo! board.

Icahn, who has put together a slate of candidates to replace Yahoo!'s board, wrote in an open letter to shareholders that he and Ballmer had discussed the possibility of restarting merger negotiations if his board is elected on Aug. 1 at Yahoo!'s annual meeting.

He also noted Microsoft's interest in an alternative transaction, which would involve the purchase of Yahoo!'s search business, an arrangement that Yahoo! has already rejected.

"Our talks centered on the industry in general but, more importantly, on how Yahoo! and Microsoft can do a transaction together," Icahn described in his letter. "Steve made it abundantly clear that, due to his experiences with Yahoo! during the past several months, he cannot negotiate any transaction with the current board."

Shares of Yahoo! were recently up $2.32, or 10.9%, to $23.67.

Yahoo! responded to Icahn's letter by pointing out that its board had approached Ballmer last month about going through with a merger at the last price he had offered -- $33 a share - only to be rebuffed.

"Now Mr. Ballmer and Mr. Icahn have teamed up in an apparent effort to force Yahoo! into selling to Microsoft its Search business at a price to be determined in a future 'negotiation' between Mr. Icahn's directors and Microsoft's management," Yahoo! said in a statement. "We feel very strongly that this would not lead to an outcome that would be in the best interests of Yahoo!'s stockholders."

The company said that if Ballmer is genuinely interested in purchasing Yahoo!, he should make a proposal immediately.

"And if Mr. Icahn has an actual plan for Yahoo! beyond hoping that Microsoft might actually consummate a deal which they have repeatedly walked away from, we would be very interested in hearing it," Yahoo! added.

Microsoft confirmed that it has been in talks with Icahn after failing to reach a deal with Yahoo!'s current board.

"While of course there can be no assurance of a future transaction, we will be prepared to enter into discussions immediately after Yahoo!'s shareholder meeting if a new board is elected," Microsoft said in a statement.

The company also said that it would not make any ongoing commentary prior to Yahoo!'s annual meeting.