But as Yahoo's troubles deepened in the second half of that year and throughout 2007, and as Microsoft kept spinning its wheels in its online efforts to compete against Google, the idea of a merger began to seem plausible.
On 1 February, the rumours became a reality as Microsoft announced its $44.6 billion (£22.9 billion) acquisition offer for Yahoo.
Over the next three months, the companies starred in a highly emotional exchange of accusations, veiled insults and threats that culminated in Microsoft withdrawing its offer on 3 May.
That wasn't the end, however. The companies engaged in a fresh round of conflicting accounts as to why the talks collapsed, and Yahoo's CEO Jerry Yang found his actions being publicly second-guessed by vocal shareholders and financial and industry analysts.
Now in the latest twist, the billionaire investor Carl Icahn has reportedly bought 50 million shares of Yahoo stock and is considering a proxy fight to replace its board members and rekindle the talks with Microsoft.
Here is a timeline of the major milestones of Microsoft's pursuit of Yahoo:
May 2006: Some of the earliest rumours that Microsoft is considering an offer to buy Yahoo appear in the New York Post and The Wall Street Journal; at the time such a deal is considered far-fetched and the rumours are dismissed fairly quickly.
October 2006: Rumours begin to swirl that Yahoo has approached Time Warner about purchasing AOL, a notion somewhat more believable than a Microsoft-Yahoo deal.
2007: Microsoft-Yahoo rumours surface from time to time but disappear soon after, as there is nothing to substantiate them.
1 Feb., 2008: In the shot heard 'round the Internet, Microsoft makes a formal purchase offer of $44.6bn (£22.9bn) based on Yahoo's stock price of $19.18; Yahoo's stock price starts rising.
11 Feb.: Yahoo rejects Microsoft's offer as too low; Yahoo's stock price closes at $29.87. According to the rumour mill, Yahoo is now looking for closer to $40 a share because the value of the company has risen since the offer.
12 Feb.: Microsoft for the first time publicly hints in a letter to Yahoo that it is Yahoo rejects Microsoft's offer in its takeover, saying it "reserves the right to pursue all necessary steps to ensure that Yahoo's shareholders are provided with the opportunity to realize the value inherent in our proposal."
5 March: Reports emerge that Yahoo is stepping up negotiations with Time Warner for some kind of tie-up with AOL. Meanwhile, reports make the rounds that Microsoft will mount a proxy fight if Yahoo won't play ball.
11 March: News Corp.'s Rupert Murdoch says he won't "get into a fight" with Microsoft over Yahoo, because the software giant has "a lot more money" than his company.
5 April: Microsoft sends Yahoo a join-us-or-die letter, claiming that if the two companies can't make a deal in three weeks, Microsoft will take its offer directly to shareholders in a proxy battle. In the letter, signed by Microsoft CEO Steve Ballmer, Microsoft basically tells Yahoo board members they've run out of better options, and it would be foolish not to accept an offer immediately. Microsoft also hints that it would consider Yahoo less valuable if it is forced to mount a proxy fight, thus threatening to lower its offer.
7 April: Yahoo again rejects Microsoft's offer on the basis that it is too low. In a letter signed by Chairman Roy Bostock and Yang, the company calls Microsoft's threat of a proxy battle "unproductive" and says it would consider a deal if Microsoft were willing to pony up more money.
9 April: Yahoo says it is testing the display of Google search ads in a small number of its search-engine queries, a move seen as a way to stave off Microsoft's advances. Microsoft immediately attacks the move as anticompetitive and says it would never pass regulatory approval.
10 April: News Corp. is said to be in talks with Microsoft to join forces to buy Yahoo, seen by many as a way that Microsoft can raise its offer without spending more money. At the same time, talk of a Yahoo-AOL union again again makes the rounds.