July 7 (Bloomberg) -- Microsoft Corp. said it may revive takeover talks with Yahoo! Inc., the second most popular U.S. search engine, if investors back Carl Icahn's attempt to oust the board and Chief Executive Officer Jerry Yang.

Yahoo shares rose the most since Feb. 1, when Microsoft disclosed its initial offer. The software maker said it might try to buy the search business or the whole company. Microsoft has been in talks in the past week with Icahn, the billionaire who controls about 69 million Yahoo shares.

Icahn is building momentum ahead of a Yahoo shareholder vote on his board slate next month. Icahn, who said the companies need to combine to compete with Google Inc., has already won backing from holders including T. Boone Pickens, chairman of BP Capital LLC, and hedge-fund manager John Paulson.

``Icahn's hand is greatly strengthened, and I think here will be a growing impetus from shareholders to go for Icahn,'' Sanford C. Bernstein's Jeff Lindsay said in an interview. ``Significant disillusionment has set in with Yahoo shareholders.'' The New York-based analyst expect Yahoo shares to perform in line with the market, and doesn't own them.

Yahoo advanced $2.56, or 12 percent, to $23.91 at 4 p.m. New York time in Nasdaq Stock Market trading. Microsoft, the world's biggest software maker, gained 5 cents to $26.03.

There can be no assurance of a transaction, Microsoft said in an e-mailed statement today. Yahoo responded by inviting Microsoft to make another proposal immediately, saying the software maker is the one that has repeatedly walked away from talks.

Precipice

Yahoo ``is now moving toward a precipice,'' Icahn, 72, said in a separate statement today. ``It is time for a change.'' He said his talks with Microsoft CEO Steve Ballmer had lasted as long as an hour and that some included executives such as Kevin Johnson, the president of the platform and services unit.

Icahn may win backing from Capital Research Global Investors, an arm of Capital Group Cos., the D: All Things Digital site reported today. Fund manager Gordon Crawford told Yang last week that he might vote against Yahoo's directors, the site said, citing people familiar with the matter.

Capital Group Cos. is Yahoo's largest investor, with a stake of about 16 percent, according to data compiled by Bloomberg. Capital Research Global Investors holds about 6.5 percent. Crawford's assistant said he wasn't available to comment today.

Microsoft originally offered about $44.6 billion for Yahoo, or $31 a share. That's 62 percent more than the Internet company's stock price before the bid. Yang rejected the offer, saying the company he founded more than a decade ago is worth more because of its growth prospects and Asian operations.

Deal History

Microsoft is getting advice from a Morgan Stanley team led by Paul J. Taubman, head of investment banking, and from Blackstone Group LP. Yahoo is using a Goldman Sachs Group Inc. team led by Gene T. Sykes and Jon Woodruff, as well as Lehman Brothers Holdings Inc. and Moelis & Co.

Ballmer raised the bid as high as $33 a share to sway the board, and walked away on May 3 after Yang, 39, asked for $37. That prompted Icahn to enter the fray, buying Yahoo stock and calling for the Internet company to reopen negotiations.

Less than a month later, the software maker began talks on an alternative transaction, such as a possible acquisition of Yahoo's search business. Taking over Yahoo's search unit would help Microsoft triple its share of U.S. Internet queries, narrowing the gap with market leader Google.

Yang in Trouble?

Those discussions collapsed last month, when Yahoo announced a search partnership with Google. Microsoft had offered to buy $8 billion in Yahoo shares for $35 each and the search business for an additional $1 billion. The two companies also would have struck a long-term search engine partnership guaranteeing Yahoo higher revenue for three years than what it gets from its own ad system, Johnson said in an e-mail at the time.

``Yang is in serious trouble,'' said Anthony Sabino, a law and business professor at St. John's University in New York who is following the case. ``Anybody who is straddling the fence is now starting to tip over to the Icahn side.''

Yahoo handled about 20.6 percent of U.S. Internet searches in May, more than twice as many as Microsoft. Mountain View, California-based Google dominated, accounting for almost two- thirds, according to researcher ComScore Inc.

Before today, Yahoo's stock had dropped 18 percent since June 11, the day before Microsoft said it would end attempts at a transaction. Icahn and his backers hold at least 10 percent of Yahoo's shares, according to data compiled by Bloomberg. Yang and co-founded David Filo together own about 9.5 percent, Bloomberg data show.

Icahn aims to replace Yahoo's board with nine nominees that include himself, Dallas Mavericks basketball team owner Mark Cuban and former Viacom Inc. CEO Frank Biondi Jr. Yahoo's shareholder meeting is scheduled for Aug. 1.

``There's a lot more credibility behind Carl Icahn's slate,'' Canaccord Adams Inc.'s Colin Gillis said in an interview. The New York-based analyst advises investors to hang on to Yahoo stock.

To contact the reporter on this story: Amy Thomson in New York at Athomson6@bloomberg.net; Crayton Harrison in Dallas at tharrison5@bloomberg.net

Last Updated: July 7, 2008 16:08 EDT