Michael Liedtke
THE ASSOCIATED PRESS

SEATTLE–Microsoft Corp. has withdrawn its $42.3-billion (U.S.) bid to buy Yahoo Inc., scrapping an attempt to snap up the tarnished Internet icon in hopes of toppling online search and advertising leader Google Inc

Option investors bet heavily on Monday that Yahoo might strike a deal of some sort with Microsoft Corp, spurred on in part by pressure from activist shareholder Carl Icahn.

Microsoft has proposed an alternative deal for Yahoo, a complex transaction that would include just buying Yahoo's search business, rather than a full buyout, a person familiar with the discussions said on Monday.

Google Inc. Chief Executive Eric Schmidt called Yahoo Inc. CEO Jerry Yang to offer his company's help in any effort to thwart Microsoft Corp.'s unsolicited $44.6 billion bid for Yahoo, say people familiar with the matter.

Neither Microsoft Corp (MSFT.O: Quote, Profile, Research) nor Yahoo Inc (YHOO.O: Quote, Profile, Research) wants to blink first in the software giant's proposed $41.7 billion takeover of the Web pioneer but as the gamesmanship drags on, archrival Google Inc (GOOG.O: Quote, Profile, Research), the merger's raison d'etre, is the biggest beneficiary.

Microsoft wants to acquire Yahoo search and is seeking partners, including Time Warner and News Corp., to take over the rest of Yahoo's business

Microsoft’s proposed $45 billion buy of Yahoo would give the Redmond, Wash company control over a top open source e-mail company, open source projects and an open source infrastructure. On September 17 of 2007, Yahoo bought Zimbra for $350 million. Yahoo’s infrastructure is built on BSD. Yahoo has released a myriad of software to the open source community and even sponsors some open source projects. So this deal would put Microsoft directly into the open source software business.

So Canonical will make money from Yahoo searches (really Microsoft now with Bing powering Yahoo search) to help fund their efforts.

Microsoft Corp. has yet to convince Yahoo Inc. to agree to a friendly takeover, but the software company is already hiring lobbyists to help it convince regulators to let the deal _ hostile if it has to be _ go through.

Microsoft is talking to Yahoo! about an alternative transaction that doesn't involve an acquisition, the world's largest software maker said Sunday.