Billionaire media mogul Rupert Murdoch is reportedly trying to muscle in on Microsoft’s takeover plans for the Internet search engine Yahoo!.

Reports today say the News Corporation chairman is in talks about the possibility of merging his MySpace social networking site with Yahoo! in an effort to help it fend off the Microsoft approach.

Microsoft had wanted to buy Yahoo! to challenge Google’s online domination and News Corp is said to be keen on a deal with Yahoo! for the same reason.

Yahoo! rejected Microsoft’s initial 44.6 billion US dollar (£22.6bn) approach on Monday. But analysts said these talks are unlikely to produce a real alternative to Microsoft’s bid, which Yahoo has rejected as too low, but which a number of its investors support as offering a clearer, more secure future for Yahoo as well as an immediate investment return.

Microsoft’s takeover plans for the Internet search engine Yahoo!.

Reports today say the News Corporation chairman is in talks about the possibility of merging his MySpace social networking site with Yahoo! in an effort to help it fend off the Microsoft approach.

Microsoft had wanted to buy Yahoo! to challenge Google’s online domination and News Corp is said to be keen on a deal with Yahoo! for the same reason.

Another advantage for Yahoo is that News Corporation owns the world’s largest social networking site MySpace. Yahoo’s attempts at entering the world of social networking have not been very successful.

A tie-up would represent the latest expansion of Mr Murdoch’s media empire following his five billion US dollar (£2.37bn) acquisition of Wall Street Journal publisher Dow Jones last year. He bought MySpace for 580 million (£294.2) US dollars in 2005.

Murdoch, who was able to buy Dow Jones, including the Wall Street Journal, despite being initially rebuffed, has said that he is not interested in buying Yahoo and it would be difficult for him to outbid Microsoft.

But any deal would help News Corp and Yahoo counter Google’s growing dominance of the web and would also deprive Microsoft of an opportunity to catch up. On the other hand, Yahoo may just be using the threat of a tie up with Murdoch to get Microsoft to improve its offer.

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SAN FRANCISCO – Yahoo. Inc.’s talks with Google Inc. and News Corp. are designed to extract a bid perhaps as high as $40 per share from Microsoft Corp., though that price is improbable and the software giant is likely to succeed in its buyout quest, an analyst said Thursday.

“We view Yahoo’s board rejection of the Microsoft (MSFT: 28.50, -0.46, -1.58%) offer as a first step in a long drawn out process at the end of which Microsoft will prevail,” Jefferies & Co. analyst Youssef H. Squali said in a client note.

Last week Yahoo (YHOO: 29.98, +0.10, +0.33%) rebuffed Microsoft’s $31-per-share offer and said it undervalued one of the world’s largest Internet portals. Yahoo’s board is believed to want at least $40 per share, or about $56 billion.

Since then rumors have flown that Sunnyvale, Calif.-based Yahoo is or was talking with everyone from Time Warner Inc.’s AOL (TWX: 16.44, -0.14, -0.84%) unit to Google Inc. about potential joint ventures or corporate combinations.

The latest chatter involves Rupert Murdoch’s News Corp.(NWS: 19.95, +0.02, +0.10%)swapping its MySpace Web site for 20 percent of Yahoo plus an infusion of cash, Squali said. This deal, though, has some challenges.

“We expect Yahoo shareholders to prefer a clean, tangible bid from Microsoft over a convoluted transaction using a lofty valuation for MySpace (proposed at $6 billion to $10 billion),” Squali said in a note to clients.

Other industry insiders say that Yahoo may hook up with Google (GOOG: 532.25, -2.37, -0.44%) to power its search engines. If true, regulators would likely reject the move, which would likely damage Yahoo’s long-term value because a third of its revenue would come from a competitor, he said.

In the end, Microsoft is likely to lobby major shareholders to its cause and “try to change the poison pill provision by appointing its own slate of directors to the board,” Squali said. Next year all of Yahoo’s board members are up for re-election, he said.

Squali kept his “Buy” rating and $31 price target.

In other Yahoo news, Chief Executive Jerry Yang said in a letter to shareholders that Yahoo is about to rebound from a two-year financial slump.

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The competition between Microsoft and Google took a new turn on February first. Microsoft made a public offer to buy the Internet company Yahoo. Microsoft says the combined companies would be in a better position to compete against Google in the online services market.

This week, Yahoo rejected the offer. Its board of directors said the price undervalued the company. The offer was worth almost forty-five billion dollars in cash and stock, or thirty-one dollars per Yahoo share. Yahoo is said to want forty dollars a share.

Microsoft says it offered a full and fair price. It says moving forward quickly with the deal would be in the best interest of shareholders. Yet since February first, the value of Microsoft’s offer has fallen to twenty-nine dollars a share because of a drop in its stock.

Microsoft thinks it could better compete against Google with Yahoo’s expert knowledge. Microsoft could attempt a hostile takeover. But that is not the way it normally does business, and there is risk of angering Yahoo’s employees.

In the last two weeks, Yahoo has discussed possible combinations with other companies, including the News Corporation, AOL and Google. But Yahoo may not be able to avoid a buyout by Microsoft. The latest reports are that some big Yahoo shareholders would support a deal if Microsoft raised its offer.

The purchase would be the largest ever by the world’s leading software maker. Yet Microsoft has made little progress in its Internet search abilities and in the growing business of online advertising. Google, the leading Internet search company, is the strongest competitor for those advertising dollars.

Microsoft is based in Redmond, Washington. Yahoo and Google are in California’s Silicon Valley.

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