By Daisuke Wakabayashi

SEATTLE (Reuters) - Microsoft Corp said on Wednesday that Kevin Johnson, who as president of Microsoft's largest business division spearheaded the company's pursuit of Yahoo Inc , is leaving the software maker.

Microsoft will undergo a reorganization, splitting the division that Johnson runs -- platforms and services -- into two groups, one focusing on the Windows operating system and the other on search and other online services.

Johnson's departure is the latest hurdle to a possible transaction between Yahoo and Microsoft, a few days after the Web company and investor Carl Icahn settled a looming proxy fight to force Yahoo to strike a deal with Microsoft.


A source briefed on the matter said Johnson will leave to become the chief executive at Juniper Networks Inc , which makes equipment for communications networks.

The departure of Johnson, who worked closely with Ballmer during its on-again, off-again negotiations with Yahoo, is another setback for Microsoft's online business, where the company is trailing Google Inc .

Three executives working in the Windows division will report directly to Ballmer, while the company said it will conduct an internal and external search to find a new head for its online services business.

The head of Microsoft's online advertising group and Web search operations will remain in place. The new structure will allow the online business to be more agile and more focused, Ballmer said in a news release.

The last few months were hectic for Johnson.

In February, Microsoft offered more than $40 billion to buy all of Yahoo. When the Web pioneer rejected that initial offer, Microsoft countered with a proposal to buy only Yahoo's search business but that offer was also turned down.

Johnson, known as "KJ" within the company, was in the inner circle of Microsoft executives who tried desperately to clinch a deal with Yahoo in order to build up its search market share and strengthen its online advertising business.

Microsoft even sided with billionaire investor Carl Icahn, who was seeking to replace Yahoo's board. However, earlier this week, Yahoo and Icahn settled their dispute, granting the investor three board seats to defuse a proxy battle.

Yahoo investors took that as a sign that there would be no imminent deal with Microsoft and Yahoo's shares fell.

Johnson joined Microsoft in 1992 and worked his way up to being the head of worldwide sales. He was then put in charge of the Windows business and tasked with incorporating the online services business with its traditional software groups.

Microsoft's platform and services division accounted for about a third of Microsoft's revenues and included its most profitable business, Windows, and its weakest link, online services.

A source close to Microsoft said that Johnson has been searching for an opportunity to run his own company.

Johnson's departure is another sign of a changing of the guard within Microsoft's top ranks. Bill Gates, Microsoft's non-executive chairman, stepped down from day-to-day duties at the company at the end of June to focus on philanthropy.

Jeff Raikes, who had led Microsoft's Office business, announced earlier this year that he also planned to leave the company. He later accepted the CEO job at Gates' charitable organization, the Bill & Melinda Gates Foundation.

Microsoft did not announce when Johnson would leave.

Juniper declined to comment. The company, which has been searching for a chief operating officer, is reporting quarterly earnings on Thursday.

(Reporting by Daisuke Wakabayashi; Editing by Andre Grenon, Gary Hill and Carol Bishopric)

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