Microsoft is ready to make a deal with Yahoo, the company confirmed Monday morning--if shareholders oust the incumbent board.

A statement from the Redmond, Washington, software maker acknowledged that the company has held talks with billionaire investor Carl Icahn, who is leading a proxy fight to unseat the Yahoo board of directors.

The publicity offensive injects Microsoft into the center of the proxy war that will be decided August 1 at Yahoo’s shareholder meeting.

Although Microsoft said in its statement that it has concluded that it cannot reach a deal with Yahoo’s current management and board, it would interested in discussing “a major transaction” with a new board after the shareholder election.

That deal could involve buying the company outright or only its online search unit “with large financial guarantees.”

Microsoft was confirming contents of an open letter to Yahoo shareholders from Mr. Icahn. That letter, also released Monday, said Mr. Icahn has spoken at length over the past week with Microsoft Chief Executive Steve Ballmer regarding a possible deal with Yahoo.

On the news, shares of Yahoo jumped $1.87, or 8.8 percent, to $23.22 in late morning trading. Microsoft, meanwhile, edged up $.13, or .5 percent, to $26.11

The Icahn letter suggested that Mr. Ballmer was afraid of putting Microsoft’s capital at risk while the company waited at least nine months for regulatory approval of any deal with Yahoo.
“Steve made it abundantly clear that, due to his experiences with Yahoo during the past several months, he cannot negotiate any transaction with the current board,” the Icahn letter said. “His logic is simple. If and when a transaction was consummated, Microsoft would be guaranteeing a great deal of capital at closing.”

Mr. Icahn noted that a transaction could take at least nine months to pass regulatory muster in the United States and abroad.
“During that period, if the current board and management team of Yahoo! mismanage the company (and their recent track record is far from reassuring), Microsoft would be putting its money at risk and a great deal could be lost,” the letter said.

Though Microsoft said it respects “the right of Yahoo’s shareholders to determine the destiny of their company,” the new statement thrusts the software company into the thick of the proxy fight.

Mr. Icahn had made engaging Microsoft in takeover talks a central plank of his proxy war. Yahoo Chairman Roy Bostock and Chief Executive Jerry Yang had countered that Microsoft had broken off takeover talks and no longer was interested in a transaction.

By publicly dangling the possibility of new negotiations, Microsoft could weaken the position of the nine-member incumbent board.

On January 31, Microsoft made a $31 per share unsolicited bid for Yahoo. Negotiations stretched on for two months and Microsoft raised its bid by $2 per share, but the price never reached the $37 per share threshold that Yahoo was seeking.

After the Microsoft negotiations broke down, Yahoo clinched a deal with Google to outsource some of its search advertising in a bid to bring in additional revenue.

Microsoft, meanwhile, sees a deal for Yahoo’s search business as a way to counter Google’s dominance in online advertising.