San Francisco - Yahoo and AOL could merge in a surprise move to fend off Microsoft's bid for Yahoo, the Wall Street Journal reported Thursday. However the strategy could be thwarted by Microsoft, which is holding talks with Rupert Murdoch's News Corp to form a joint bid for the internet site, according to the New York Times. Such a deal would create a new internet giant by combining Yahoo with Microsoft's MSN and News Corp's MySpace.
The reports said Yahoo and AOL are "closing in on a deal" in which Yahoo would receive a cash investment from Time Warner in exchange for a 20-per-cent stake in the combined Yahoo-AOL business. The deal, which would exclude AOL's fading dial-up internet access business, would value AOL at about 10 billion dollars.
Yahoo has so far stridently rejected Microsoft's takeover bid, which values the company at between 41 billion dollars and 45 billion dollars.
The developments followed reports that Yahoo plans to outsource some of its search advertising to Google in a bid to raise revenues. The test programme is designed to allow the two sides to evaluate the revenue potential of a broader search ad outsourcing arrangement.
While a broad alliance between the two search giants would likely fail to pass antitrust regulations, a more limited partnership would boost Yahoo revenues by allowing it to tap in to Google's more profitable search advertising system.
The new approaches also followed criticism of Microsoft by Yahoo's largest shareholder. Microsoft last week threatened to wage a proxy campaign and lower its offer for the internet giant. But Bill Miller, a portfolio manager at Legg Mason Inc, said Microsoft should have raised its bid rather than threatening to lower it if Yahoo did not accept the offer within three weeks.
"Telling shareholders you are going to take something away from them is not a way to get their support," he told the Journal. Miller also said he did not think Yahoo shareholders would support a Microsoft-led proxy campaign to replace the current Yahoo board.
Microsoft offered some 46 billion dollars in a cash and stock deal for Yahoo in late February. Yahoo rejected the deal as undervaluing the company, and a subsequent drop in Microsoft's share price means the offer is now worth some 41 billion dollars.
