SEATTLE/SAN FRANCISCO, June 13 (Reuters) - Microsoft Corp (MSFT.O: Quote, Profile, Research, Stock Buzz) offered Yahoo Inc (YHOO.O: Quote, Profile, Research, Stock Buzz) $1 billion in cash to buy its search business in a deal that would have delivered $1 billion in additional annual operating income to Yahoo, a source familiar with Microsoft's thinking said on Friday.
In an alternative to a full acquisition, Microsoft would have taken control of Yahoo's search business, delivering the company better rates for advertisements tied to its search results than Yahoo's current Panama advertising system, the source said.
Microsoft would have also paid $8 billion to take a 16 percent stake in Yahoo, which would have valued the company's stock at $35 a share, the source said.
Talks between the two companies broke down after Yahoo entered into an advertising agreement with Google Inc (GOOG.O: Quote, Profile, Research, Stock Buzz). Microsoft is still open to discussing its proposal despite Yahoo's agreement with Google, the source said.
Yahoo had no immediate comment. (Reporting by Daisuke Wakabayashi in Seattle and Anupreeta Das in San Francisco, editing by Gerald E. McCormick)
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