Report: Former Vodafone chief to pull out of Yahoo CEO search

Updated at 7:21 a.m. PDT with a Collins Stewart analyst report.

Former Vodafone chief Arun Sarin reportedly is withdrawing his name from the Yahoo CEO search, in part due to the uncertainty whether the Internet search pioneer will be broken up and sold, according to a report in the Financial Times.

Sarin, who was considered a strong candidate who had made it through to a narrowed list of prospective candidates, reportedly had several issues in considering the Yahoo post.

According to the Financial Times:

Mr. Sarin is considering alternative roles at other U.S. public companies, plus at least one position at a private equity firm, people close to him said.

It is understood that one reason for his rejecting Yahoo was a perceived risk that the company could be dismembered.

Microsoft has repeatedly expressed interest in Yahoo's search business, initially making an offer to buy the entire company for $33 a share and later scaling it back to simply Yahoo's search business after those talks failed Those efforts failed, too, and for the last several months the parties have not held negotiations.

Sarin was thought to be a top candidate, given his executive experience at a large public company, his background in technology, and his deep knowledge of the telecom industry, given that mobility is a growth area for Yahoo.

The Internet pioneer, which has lost its lead in paid search market share and revenue to Google, potentially faces a more difficult task in selecting a CEO than other companies.

Yahoo not only needs to find a chief executive who can improve its fortunes in its current form, but also one who could achieve similar results without a major chunk of its business.

A potential problem for Yahoo and Microsoft is they may be caught in a catch-22.

Microsoft, according to previous comments by sources, is likely to wait until Yahoo names a new CEO before doing the search dance again. But Yahoo may face a protracted effort in attracting a CEO, due to the uncertainty of a deal with Microsoft.

Meanwhile, analyst Sandeep Aggarwal of Collins Stewart, believes that Microsoft is waiting for Yahoo to name its CEO before returning with a search deal that could give Yahoo's stock a $8 to $10 a share lift.

Here's what Aggarwal had to say Tuesday in his research note:

Summary: In our view the only thing left between MSFT & YHOO for a possible search deal is a new CEO at YHOO. We think that by now MSFT has probably completed basic ground work for a search deal structure with Yahoo, given that: 1) CEO (Steve) Ballmer continues to express MSFT's strong interest in YHOO's Search and 2) this is the time of the year when MSFT typically starts the annual strategy reviews process for each of its business units. We continue to believe that a search deal can give YHOO $8 to $10 per share lift. We reit our Buy/$18 PT...

What kind of upside a search deal can provide to Yahoo?
In our view a MSFT/YHOO search deal may not be as lucrative as MSFT's prior offer on May 29th (economic outlook weakened, MSFT gaining traction in search, YHOO search metrics did not improve). At the minimum it can still provide $11bn to $13bn lift to YHOO's EV--assuming $1bn in upfront payment and $1bn in incremental OCF ($300mm in margins and $700mm in minimum savings) @ 10x to 12x fwd multiple.

Structure of a possible MSFT/YHOO Search deal
Though a possible MSFT/YHOO Search deal may be structured in several different ways, we think that broadly it will be quite similar to a Google AdSense type of Search deal but delivering exclusivity/long-term visibility to Microsoft. Hence, we expect a "Sale and Leaseback" structure wherein YHOO sells its Search assets (i.e. Search technology, IT data centers, Search related headcount, and advertisers' contracts) to Microsoft. In return Microsoft pays $1bn in an upfront payment for the assets acquisition and deploys its Search technology at YHOO with minimum guarantees of $2.5bn+ annually in Search revenues to YHOO and $700mm in Op-Ex savings.

Yahoo CEO Jerry Yang announced last month that he will step down.

Shares of Yahoo were up 2 percent to $13 a share in morning trading.