Microsoft is expected to pay about $1.2bn (£0.8bn) for the company, the FT said. The company spent $1.1bn on a US business software developer, Great Plains Software, last year. Both Navision and Great Plains develop business-planning software for small and medium-size companies.
Navision released a statement in response to the rumours saying that it "can confirm that it is considering a possible strategic transaction". Director of corporate communications Søren Christensen would not expand on this, saying that "'strategic transaction' is a deliberately broad term that could cover many things and I cannot add anything to the wording".
Microsoft, likewise, would not comment on the report.
Christensen would not give any likely timing on negotiations, saying only that they "may result in an agreement on the proposed deal or they may not. We will release more information if and when there are more developments."
While noting that the deal has not been confirmed by either company, one analyst said buying Navisoft would make sense for Microsoft. The deal would bring it products that are familiar to small and medium-size businesses in Europe, where Great Plains is not as well known, said Nigel Montgomery, European research director for AMR Research in London.
"Great Plains, by all accounts, doesn't suit the European market well and doesn't have a position here at all," he said. "For Microsoft to be credible in Europe it needs a product for this market or it needs to flesh out the functionality of Great Plains to satisfy the European market."
While Microsoft has plenty of talented programmers, it lacks specific knowledge about the way small and medium-sized companies do business in Europe, he said. Buying Navision would bring it not only a product tailored for European markets but also a network of some 2,000 systems integrators and resellers that have ties to European businesses and know how they work.
A deal would also help Microsoft better compete with SAP, particularly with software for smaller businesses that the German software maker recently acquired from Israel's TopManage Financial Solutions, Montgomery said.
If it turns out that Microsoft is not courting Navisoft, other possible suitors include business software makers JD Edwards and SSA Global Technologies, each of which could benefit from Navisoft's small business software, he added.