Microsoft and Yahoo! were in intensive talks last night over securing a takeover agreement that would dissuade the software giant from launching a formal hostile offer for the online search engine.

It is thought that Microsoft is discussing whether to raise by several dollars its offer of $31 a share. Securing an agreement between the two would draw to a close a three-month stand-off. In February, Steve Ballmer, the chief executive of Microsoft, sent a letter to Jerry Yang, co-founder and chief executive of Yahoo!, indicating that he planned a hostile takeover of the company. The proposal valued Yahoo! at about $44 billion (£22 billion).

Mr Yang rejected the offer as being too low and sought a rival joint venture with a number of other companies, such as Google, News Corporation – the parent of The Times – and AOL, the internet business of Time Warner. Discussions with these companies are said to be continuing.

From its initial approach, Microsoft has threatened – and failed – to launch a proxy fight against Yahoo! and remove a handful of directors to try to force through its own offer. Should talks over a friendly takeover not succeed, it is not known whether Mr Ballmer would pursue such a strategy.

Yahoo! has suffered eight consecutive quarters of profit decline and, before the Microsoft offer, saw its stock fall by 40 per cent over 12 months. Critically, it has also lost part of its share of the $40 billion online advertising market to Google, its dominant rival.

Microsoft is desperate to take over Yahoo! because of the threat that Google’s dominance of the online search advertising market poses to the computer company’s future. Last year, after long discussions about a merger between the two, Yahoo! declared that it was not up for sale.

But it did agree to draw up proposals about how the two could cooperate to fight Google more effectively. Yahoo! is thought to have reneged on its promise and Microsoft has become increasingly frustrated over the past 12 months as Google grew stronger and Yahoo! lost market share and was forced to cut 1,000 jobs.

Share in Yahoo! jumped 7 per cent yesterday on hopes of a higher deal, but were still well below the existing $31 a share on the table.

On Wall Street the shares closed at $28.67 each. Yahoo! has managed to dodge Microsoft’s threats to force executive changes on its board by postponing and refusing to declare a new date for its annual meeting. Under the terms of Yahoo!’s incorporation, shareholders can make nominations for their own executives in the few weeks ahead of the yearly meeting.

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