Feb. 26 (Bloomberg) -- Microsoft Corp., trailing Google Inc. in online advertising and search-engine users, said a possible agreement with Yahoo! Inc. wouldn’t fix all of the shortcomings of its Internet business.

“Yahoo doesn’t have the magic solution,” Chief Financial Officer Chris Liddell said at a Goldman Sachs Group Inc. conference in San Francisco. “No one should think it will transform the industry.”

Microsoft’s Live.com Internet search brand has fared poorly, Liddell said, and the company is considering a new one. Microsoft has proposed joining forces with Yahoo’s search engine to compete against Google. Still, that would be no “silver bullet,” and Microsoft is assuming the deal won’t happen at all, Liddell said.

No one at Microsoft thinks its Internet business has done as well as it should, he said. If a deal happens with Yahoo, “that’s great,” Liddell said.

Google handles 63 percent of search queries in the U.S., according to ComScore Inc. of Reston, Virginia. That gives it more opportunities to sell ads. Even combined, Yahoo and Microsoft’s online advertising businesses generated less than half of Google’s revenue in the fourth quarter.

Microsoft fell 54 cents, or 3.2 percent, to $16.42 today on the Nasdaq Stock Market. Google shares dropped $4.46, or 1.3 percent, to $337.18.

Google’s Android

Microsoft also is preparing for new competition from Google’s Android software on cheap laptop computers. Microsoft’s Windows operating system will provide a better experience for those customers, Liddell said. The company is the largest software maker, with Windows running more than 90 percent of the world’s personal computers.

Makers of so-called netbooks -- low-cost computers designed to handle Web surfing, e-mail and other simple tasks -- are adapting Android for use on their systems.

While netbooks running Android will probably be cheaper, “there’s a basic experience that we’d be happy to compete on,” Liddell said. People are willing to spend a bit more if the software is better, he said.

Windows has already replaced the Linux operating system in most netbooks, even though its cost is higher, he said. Customers want the programs and familiarity that come with Windows, Liddell said.

He also said that Microsoft may sell $1 billion to $3 billion of debt at some point in the next six months. Microsoft said in November that it’s considering issuing senior unsecured debt. The company is authorized for $4 billion in debt after selling $2 billion of commercial paper last year.

Microsoft won’t “fundamentally change its capital structure,” Liddell said.

The company may repurchase a smaller amount of shares for a quarter or two if it decides it wants to conserve more cash, he said.

To contact the reporter on this story: Dina Bass in Seattle at dbass2@bloomberg.net

Last Updated: February 26, 2009 18:22 EST