Microsoft can afford Yahoo! and a combined MSN/Yahoo! would certainly be a stronger competitive player against Google, something that is clearly on Ballmer’s mind right now. That seems the most likely deal to me.
It’s surprising that Yahoo! finds themselves in this place. They made the right move to get into search with the Overture deal and are the only other viable competitor in search right now. Microsoft may get there, but they aren’t yet. But Yahoo!’s user and page growth is slowing and their monetization efforts are slowing too. And the market doesn’t like slowing.