A three-month merger dance appeared to be in its final stages Friday as Microsoft and Yahoo were in intense negotiations that could result in a deal as soon as this weekend.
Microsoft has indicated a willingness to raise its $31-a-share cash and stock offer by several dollars a share, a person familiar with the company's thinking said Friday.
(Msnbc.com is a joint venture of Microsoft and NBC Universal.)
The original offer, made public Feb. 1, is currently valued at about $42 billion, but each $1 per share increase would boost the value by $1.4 billion.
Talks were widely described as sensitive, and the outcome was uncertain.
Earlier Friday, the Wall Street Journal had reported that Microsoft executives were leaning toward a hostile takeover attempt in which they would bring their offer directly to Yahoo's shareholders and attempt to oust the Internet company's board in a proxy fight.
But by the end of the day, the Redmond, Wash.-based software maker had upped its offer "by several dollars" per share in an effort to keep the deal friendly, according to a New York Times report that cited unidentified sources.
Investors bet an agreement was likely, sending Yahoo shares up 7 percent on the first news of significant contact between the sides since Microsoft’s deadline for its initial offer expired last Saturday.
For weeks, Microsoft Chief Executive Steve Ballmer had held firm with the original offer, insisting it was fair in light of Yahoo's eroding profits during the past two years.
But on Thursday he suggested he might sweeten the bid.
“I know exactly what I think Yahoo is worth to me, exactly,” Ballmer said at a meeting with Microsoft employees. ”I won’t go a dime above, and I will go to what I think it’s worth if that gets the deal done.”
Microsoft's board reportedly met this week to consider raising the bid as high as $33 per share. It wasn't clear whether Microsoft presented that figure, which would translate to about $47.5 billion, to Yahoo Friday.
Several of Yahoo's major shareholders are reportedly looking to get at least $35 per share, a price that would value the deal about $50 billion.
Most analysts have predicted all along that Microsoft eventually would buy Yahoo for $32 to $35 per share, so the news of Friday's negotiations wasn't a major surprise.
"It's all going according to script," said Ken Marlin, a New York investment banker specializing in technology deals.
A deal could give Microsoft a stronger foothold in its battle with Internet search leader Google, which is rapidly expanding into the software maker’s own turf with new Web-based applications.
Yahoo executives have repeatedly said the company was not averse to a deal with Microsoft at a higher price.
But in a sign of its reluctance, Yahoo also has tried to strike a deal with Time Warner’s AOL division and has tested a search advertising partnership with Google.
For its part, Microsoft has made clear it will not wait much longer. Ballmer said on Thursday that walking away was still an option.