SAN FRANCISCO (MarketWatch) — It was inevitable that Microsoft Corp. would take another look at Yahoo Inc. after the Internet giant began to consider an auction.

So it was a bit of a surprise that Yahoo shares YHOO leaped more than 10% on Wednesday on a report that Microsoft and Chief Executive Steve Ballmer might kick the tires again. But Yahoo shareholders need anything they can get right now.

Microsoft MSFT, +1.48% was quick to deny the report through the AllThingsD blog, whose Kara Swisher has led the reporting on this story. See Swisher’s report on AllThingsD. But Ballmer & Co. would be foolish to not at least consider how Yahoo or parts of it might help them in a tech world that's changed a lot in the three years since they first offered to buy Yahoo. With the poker game just getting started, Ballmer has a serious hand to play.

Yahoo prepares for possible buyers

If Microsoft liked Yahoo at $33 a share, which was the almost $50 billion offer it had on the table in 2008, it would love it at today’s $17 billion market cap. True, naysayers would argue that the decline in Yahoo’s value reflects the fact that it is a collection of declining assets. But at a price of $20 billion to $23 billion, there are plenty of ways to make some money out of them.

For all the hardship Yahoo’s management and board of directors have taken from investors for lack of leadership and direction, it is still a stunning group of Internet assets, with a massive reach of almost 700 million unique users.

The question of whether Yahoo is a tech company or a media company was actually resolved by ousted CEO Carol Bartz before she was fired. Her vision was that it would be a media company, and at the time of her firing she had made several steps to head in that direction. One of them was to hire Jai Singh as editor-in-chief of the news products.

Singh helped build the newsroom at The Huffington Post, but more famously, built the news operation at CNet back in the day of the original Internet bubble. He’s brought on several other strong journalists since joining this past spring, but has still only begun the process of turning Yahoo’s news and programing fiefdoms into a single news operation.

Microsoft never had any pretense about what it was — a tech company — despite its dalliances with MSN.com and its MSNBC.com partnerships. So it could spin the news business, and its 80 million monthly readers, off to another news empire, such as News Corp., parent of MarketWatch, which supplies Yahoo with news. Or it could give news a second chance, this time being a news provider instead of just an aggregator.

In any event, the news business is just one set of assets Microsoft would acquire in Yahoo. It would also acquire Yahoo’s 40% stake in Alibaba ALBCF in China, and its 35% stake in its Japanese affiliate. Both could be sold off to help pay for the deal. As Doug McIntyre from 24/7 Wall Street argued to me over a beer a few weeks ago, Ballmer could sell them back to the partners on his terms. He would have leverage over his Chinese and Japanese partners because unlike Yahoo or a private equity buyer, he could afford to wait them out if they didn’t accept his offer or until a better offer emerged.

Yahoo also reportedly holds more than a thousand patents, and of course, its search and advertising display partnership with Microsoft.

The auction is in early days right now, so everybody is posturing, and as Swisher points out in her blog, the bankers are leaking scenarios like there’s no tomorrow. But what happens when a valuable asset goes on auction is that everybody plays it cool until a real bidder emerges, and then things go crazy.

Microsoft may be over its interest in Yahoo. After all, it has the search partnership already. But Ballmer knows the tech world is consolidating and that Microsoft can’t just chug along forever, clutching its cash reserves while Apple, Facebook and Google steal all the limelight. It needs to get in the game, which thanks to the likely auction of Yahoo, has just turned into an Internet content arms race.