May 3 (Bloomberg) -- Microsoft Corp., closing in on the biggest acquisition in its 33-year history, may seek to end an impasse with Yahoo! Inc.'s board by raising its takeover offer, a person familiar with the matter said.

Talks intensified this week after Yahoo spent three months hunting for alternatives to the deal. The original cash-and-stock bid of $31 a share, or $44.6 billion, has fallen to $29.40 a share because of Microsoft's declining stock price.

A higher offer may win over Yahoo's board, eliminating the need for Microsoft Chief Executive Officer Steve Ballmer to go to shareholders with a hostile offer, which might have spurred an employee exodus. A deal also may halt Yahoo's efforts to forge an online advertising partnership with rival GoogleInc.

``The impact of the decision is wide because a hostile bid is not in the interest of either Microsoft or Yahoo,'' said Andy Miedler, an analyst at Edward Jones & Co. in St. Louis. He has a hold rating on Microsoft's shares. ``It's certainly easier to raise the offer.''

Microsoft is counting on a Yahoo marriage to help it challenge Google, the leader in the $41 billion online advertising market. Yahoo has the most visited U.S. Web site and handles more Internet queries than any company besides Google. Microsoft, the world's largest software maker, ranks third in online searches.

Yahoo climbed $1.86, or 6.9 percent, to $28.67 yesterday in Nasdaq Stock Market trading. Redmond, Washington-based Microsoft fell 16 cents to $29.24, while Google dropped $11.79 to $581.29.

Yahoo spokeswoman Diana Wong and Microsoft spokesman Frank Shaw declined to comment.

Worth More?

Yahoo CEO Jerry Yang has said Microsoft's original offer ``substantially undervalues'' his company. Yahoo is worth more because of investments in Asia and its position in the Internet search market, he said. Until now, Ballmer has stood firm on the price.

Yahoo's potential agreement with Google may have changed his mind. Yang plans to make a deal to use ad software from Google within a week unless he agrees to sell to Microsoft, said the person, who asked to remain anonymous because the takeover negotiations are private.

Yahoo, based in Sunnyvale, California, ran a test last month of Google's ad system, applying it to 3 percent of its Internet searches. A permanent agreement may help Yahoo squeeze more money from queries, generating more than $1 billion in additional cash flow, said Mark Mahaney, a Citigroup Inc. analyst in San Francisco. Google received as much as 70 percent more than Yahoo for ads from each U.S. Internet search last year, Yahoo has said.

Ballmer's Stance

Ballmer said this week he would walk away from the purchase before he overpays for Yahoo.

``I know exactly what I think Yahoo is worth to me, exactly,'' Ballmer said in a meeting with employees, according to remarks provided by Shaw. ``I won't go a dime above, and I will go to what I think it's worth if that gets the deal done.''

The acquisition would be the largest technology purchase in history, excluding telecommunications deals and the America Online Inc. merger with Time Warner Inc. in 2001. The transaction would eclipse Hewlett-Packard Co.'s $18.9 billion acquisition of Compaq Computer Corp., completed in 2002.

The purchase would turn Microsoft into the biggest seller of graphical-display ads. U.S. sales of those ads may increase 39 percent to $8.19 billion in 2011, accounting for about 20 percent of the total market, according to New York-based EMarketer Inc.

The deal wouldn't be enough to help Microsoft take the lead in the U.S. Internet search market, where Google dominates. The Mountain View, California-based company accounted for almost two- thirds of search queries in the U.S. in March, according to research firm ComScore Inc. in Reston, Virginia. That compared with Microsoft's 9.4 percent and Yahoo's 21.3 percent.

To contact the reporters on this story: Zachary R. Mider in New York at zmider1@bloomberg.net; Amy Thomson in New York at athomson6@bloomberg.net

Last Updated: May 3, 2008 00:01 EDT