If you thought the Microsoft-Yahoo courtship was intricate before, you ain't seen nothin' yet.

What's the news?

The Wall Street Journal reports that Yahoo is hoping to merge with Time Warner's AOL division, and then buy back stock in the combined entity at prices in the mid $30s. Time Warner would most likely throw in a few billion dollars to seal that deal, and this tricky sequence of dance steps would move the extra cash off Yahoo's balance sheet before Microsoft could put its grubby hands on the new loot. A deal like that could push up the legitimate price tag for Yahoo by as much as $10 billion and establish a new baseline for its share price, possibly pushing the company out of Microsoft's price range.

The same article also notes that Microsoft has been working the phones, too. Steve Ballmer is talking to Rupert Murdoch and his News Corp. crew to set up a three-way deal that would combine MySpace, Yahoo, and MSN into a single company. News Corp. has $3.5 billion of cash on hand, and could add some heft to the purchase price (though the company also has $13 billion in long-term debt, unlike Microsoft which is debt-free).

We have discussed the merits of an AOL-Yahoo combination before, and nothing much has changed in those dynamics. I'd much rather see Yahoo tacking on the AOL portal to its online real estate than watch the company getting dragged under the Microsoft umbrella, kicking and screaming.

This is the first time we've heard of Murdoch lining up on Ballmer's side of the proceedings, and I have to admit that the idea sounds intriguing. Diluting the threat of clashing corporate cultures by adding MySpace as a buffer could take some of the pain out of a Microsoft deal, particularly if the companies could figure out a way to distance the three-headed online beast from Microsoft proper, just a little bit. Redmond could actually suck in this combination and then spit it out again as a freestanding spin-off under the Yahoo name, with majority ownership and financial interests remaining in Washington State. For a recent example of this kind of structure, have a look at EMC-VMware, where EMC holds 98 percent of the voting power in its former subsidiary.

The upshot

I'm still not convinced that Microsoft would be a good fit with Yahoo, regardless of any third parties thrown into the mix, but if it has to happen, this sounds like the best idea so far. It sure beats a nasty proxy battle, which looked like a near-certain outcome only yesterday. But if Murdoch is willing to spin out MySpace to combine with MSN and Yahoo, then why not with Yahoo alone? That still looks to me like the best solution available, even preferable to Yahoo standing all alone.

But any love is good love, and you take what you can get. The question is only which suitor's big brown eyes can melt Jerry Yang's heart. The finale is drawing near.