The boss of Yahoo has said Microsoft is no longer interested in buying the company but that it "makes sense" for the two to discuss working together.
In his fullest comments since Microsoft dropped its $47.5bn bid this month, Jerry Yang admitted a merger would have had a "tremendous amount of power".
He insisted that it had been Microsoft which had broken off talks over price.
But Mr Yang said Yahoo was still "listening" to proposals being put forward by its rival.
Despite the end of bid talks, there has been continuing speculation that the duo will strike some kind of commercial arrangement to help them compete with Google in the internet search market.
Speaking at a conference in California, Mr Yang confirmed the two firms were continuing to discuss the prospect of "other partnerships".
"Microsoft is no longer interested in buying the company and they are discussing various other partnerships with us," he said.
"We definitely have to understand what they are proposing. They clearly have an interest in Yahoo and we need to understand more."
Yahoo always argued that Microsoft's offer undervalued its business but several shareholders, led by Carl Icahn, have criticised the firm for not having an alternative growth strategy.
Yahoo was forced to postpone its AGM earlier this month after Mr Icahn threatened to unseat the board, but Mr Yang said the firm did not feel "under siege".