The Wall Street Journal raised investor hopes with a story that said Jonathan Miller, who stepped down as AOL’s top exec two years ago, is trying to secure financing to make a bid for Yahoo at $20 to $22 per share, or $28 billion to $30 billion.

The story posted on the Journal’s Web site cited unnamed people familiar with the matter.

Branding the report a “rumor,” Yahoo spokeswoman Tracy Schmaler declined to comment. Miller didn’t immediately respond to interview requests.

Yahoo shares rose 76 cents, or more than 7 percent, to close at $11.50, reflecting hopes that a new suitor may emerge for the Sunnyvale-based company. The surge left Yahoo with a market value of $17.4 billion.

Given his past experience running AOL, Miller has the connections and savvy needed to turn around Yahoo, said Standard & Poor’s Internet analyst Scott Kessler.

But Miller faces a huge hurdle: A credit crunch and the prospect of the deepest recession in a generation has spooked lenders and investment funds so badly that they have shown little interest in making big bets on risky propositions like this.

Miller “has a strong reputation and an expansive Rolodex, but ($30 billion) is a lot of money to raise in an environment when deals are falling apart and companies are going out of business just about every day,” Kessler said.

Speculation about Yahoo’s future has intensified since rival Google Inc. pulled out of a proposed advertising partnership a month ago. Yahoo had been counting on the alliance to boost its profits and placate shareholders incensed about the company’s rebuff of a $47.5 billion takeover bid from Microsoft Corp.

The guessing game took a new turn two weeks ago when Yahoo founder Jerry Yang revealed his plans to step down as CEO as soon as a replacement can be found.

Yang, who became CEO in June 2007, didn’t want to sell to Microsoft because he believed he had charted a strategy that would prove the company was worth more than the software maker was willing to pay.

Most industry analysts believe Microsoft eventually will return to the bargaining table and buy Yahoo’s search engine — a concept that has been embraced by Yahoo’s most outspoken board member, Carl Icahn. Microsoft CEO Steve Ballmer also has said he remains open to that idea.

The Times of London tantalized investors during Thanksgiving weekend with a report that Microsoft was preparing to buy Yahoo’s search operations for $20 billion in a complex deal involving Miller and his current partner, former News Corp. executive Ross Levinsohn. But representatives from both Yahoo and Microsoft have since denied any discussions along these lines are taking place.

Miller almost joined Yahoo’s board during the summer after the company agreed to add three new directors to quell a shareholder revolt led by Icahn. But AOL’s corporate parent, Time Warner Inc., cited a provision in Miller’s severance agreement that prevents him from working for a rival.

The noncompete agreement expires in March, prompting some analysts to predict Miller might be hired as Yahoo’s next CEO even if he doesn’t end up buying the company.

Yahoo also has been discussing a possible combination with AOL for months, but the two sides haven’t been able to agree on terms.

Although Yahoo’s Web site remains among the most popular on the Internet, the company’s profits have been dwindling during the past three years. The recession is expected to make a comeback even more difficult by depressing spending on the Internet ads that generate most of Yahoo’s revenue.

The challenges have devastated Yahoo’s stock price, leaving it at a fraction of Microsoft’s last buyout offer of $33 per share.

The downturn has become so severe that investors are placing little value on Yahoo’s U.S. operations. Kessler estimates that just the company’s cash and Asian assets are worth about $8 per share, making Yahoo an increasingly takeover target for opportunistic investors.

“If the economic mate were different, there would be a lot of private equity funds interested” in a Yahoo buyout, said Peter Falvey, managing director of technology dealmaker Revolution Partners. “But I find it pretty far-fetched in this kind of market.”

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First, the Times’ report:

SOFTWARE giant Microsoft is in talks to acquire Yahoo’s online search business for $20 billion (£13 billion).

The proposal forms the centrepiece of a complex transaction that would see Microsoft support a new management team to take control of Yahoo. But there is no intention of Microsoft tabling another takeover bid for the web giant, after its aborted $47.5 billion offer this summer.

It is thought that Jonathan Miller, ex-chairman and chief executive of AOL, and Ross Levinsohn, a former president of Fox Interactive Media, have been lined up to lead the new management team. Senior directors at Microsoft and Yahoo are understood to have agreed the broad terms of a deal, but there is no guarantee that it will succeed…

Under the terms of the proposed transaction, Microsoft would provide a $5 billion facility to the Miller and Levinsohn management team. The duo would raise an additional $5 billion from external investors.

This cash would be used to buy convertible preference shares and warrants which would give it a holding in excess of 30% of Yahoo.

The external investors would also have the right to appoint three of Yahoo’s 11 board directors. The talks with Yahoo involve Microsoft obtaining a 10-year operating agreement to manage the search business. It would also receive a two-year call option to buy the search business for $20 billion. That would leave Yahoo to run its own e-mail, messaging, and content services.

It is expected that the operating agreement would boost Yahoo’s income by as much as $2 billion per annum.

And now Kara Swisher’s debunking:

A report in the Times of London in which Microsoft would buy Yahoo’s search business in a convoluted $20 billion deal that would include well-known Internet execs Jon Miller and Ross Levinsohn, is–in the words of one key player–”total fiction.”

Actually, that’s Levinsohn speaking, on the record. But that’s also the essential word from all key players regarding the Times’ report.

BoomTown has spoken to top sources at Yahoo (YHOO) and Microsoft (MSFT) too and all scoff at such a deal now taking place or that either side has been in any such discussions of late.

Who to believe? Let’s assume the truth is somewhere in the middle. Even if there are no actual talks taking place right this minute, there should be.

The $20 billion number is almost certainly fiction, given that, last summer, Microsoft offered to buy Yahoo’s search business for $1 billion. Microsoft also wants to own and run the search technology, so the idea of having a call option doesn’t really make sense. Microsoft and Yahoo need to merge their search businesses, however, and both companies have said publicly they are happy to discuss a deal, so the idea that they’re working on something is perfectly plausible. (And if they aren’t now, soon.)

Ross Levinsohn and Jon Miller, meanwhile, would make fine additions to Yahoo’s senior team, and they are almost certainly being considered for those roles.

Lastly, unlike everyone else in the economy, Microsoft has cash coming out of its ears. So the idea of Microsoft using some of that cash to facilitate a Yahoo deal (which it also tried to do last summer). also makes sense.

Bottom line: If Yahoo and Microsoft aren’t discussing a search deal right now, they should be and soon will be. And Yahoo’s short list of candidates for CEO probably includes Jon.

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The owner of the most popular Internet search engine said the agreement will expand the Google Book program to let online readers search for and buy copyrighted and out-of-print books in whole or page-by-page, and provide U.S. libraries with free access to the database.

“The tremendous wealth of knowledge that lies within the books of the world will now be at their fingertips,” Google co- founder Sergey Brin said today in a statement, calling the accord “historic.”

The Author’s Guild and members of the Association of American Publishers sued Google in 2005, claiming the book program’s digitizing process infringed copyrights on a massive scale. The project, which began in 2004, includes Harvard University, the New York Public Library and about 10,000 publishers in an effort to make books searchable online.

Today’s deal, which must be approved by a judge in Manhattan federal court, ends the lawsuits and expands what users find online when they search for a book. Searches in the Google Book program currently generate about three or four lines of text from a work. The settlement will expand the results to several pages and let readers buy full access to the content, the parties said.

Publishing Adversaries

Google and its former publishing adversaries will use $34.5 million of the settlement fund to create a registry program to compensate rights holders, according to court papers. Another $45 million will be used to compensate authors whose works have already been scanned without permission, the parties said.

Authors and publishers will have final say on whether their copyrighted works may be used by the program, and thus essentially allow online purchases to compete with book sales, David Drummond, Google’s chief legal officer, said.

“We’ve built a lot of controls for authors and publishers,” Drummond said today in a conference call. “If an author does not want his or her book to be in the program, they absolutely can opt out.”

Under the deal, Google will keep 37 percent of revenue from online book sales and for advertisements that run next to previews of book pages, passing the remainder to the Books Registry, which will keep an administrative fee and leave the rest for the copyright holders to collect. Google won’t share advertising that runs along search results that include links to book preview pages.

Subscription Program

The division of revenue from a subscription program for universities will be similar, the parties said on the conference call. The companies haven’t determined exactly how to distribute revenue under the subscription program, the companies said.

Google said the program will create a new market for out-of- print books. The company’s measurement of readership may include the amount of time spent viewing a book, along with the genre and publication date, according to Drummond.

“It’s always been our objective to have more than Web content in the index, especially books,” Drummond said. “Books are authoritative content. It’s higher-quality content, in general, than what’s on the Web and it’s just a fantastic thing to have for users.”

In May, Microsoft Corp., the world’s biggest software maker, ended a program that let Web users search through digital versions of books, ceding the market to Mountain View, California-based Google, which already has about 7 million books scanned.

All Revenue

Google, which gets almost all of its revenue from advertisements that run alongside search results, needs to seek ways to branch out into other types of sales, said Mark May, an analyst at Needham & Co. in New York.

“It’s a direction that Google will have to move towards, pursuing non-advertising ways of monetizing the content they have,” said May, who advises buying Google shares. “At some point they’re going to start being a distributor of premium content that can’t be subsidized by advertising alone.”

Google rose $4.33 to $333.82 at 12:35 p.m. in Nasdaq Stock Market trading.

The cases are The Author’s Guild v. Google Inc., 05cv8136 and the McGraw-Hill Cos. v Google Inc., 05cv8881, both U.S. District Court for the Southern District of New York (Manhattan).

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