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Yahoo Considers Buying AOL to Strengthen Position Against Microsoft

Yesterday Yahoo announced that it will begin testing a relationship with Google that would involve using Google’s AdSense for Search system. The news sparked a possible partnership between Yahoo and Google to strengthen Yahoo’s independence. Microsoft responded by indicating that it was already in talks with News Corp to combine resources and take the acquisition directly to Yahoo shareholders — a move known as a hostile take over.

Today, the information on the wire is that Yahoo is in talks with Time Warner and its AOL unit. The goal for Yahoo here is to absorb all of Time Warner’s AOL business unit. The deal is said to be valued at $10-billion USD and that if successful, Yahoo would receive cash from the deal with Time Warner in exchange for a 20-percent stake of Yahoo-AOL. Industry insiders say that Yahoo is close to cutting a deal with Time Warner, which would strengthen its position on asking Microsoft for more money. Before news about Microsoft’s talks with News Corp, no other company was vying for Yahoo, which gave Microsoft strong reason not to increase its offer of $42-billion USD.

News Corp said that it may use assets from its MySpace unit to help bolster a move against Yahoo. Google’s stance on the acquisition has always been that the company believes the Internet would be hurt if Microsoft was allowed to buy Yahoo.

Yahoo itself is in a difficult situation. With no competitive offers on the table, the company is quickly searching for alternative leverages. Wall Street analysts however, believe that Yahoo does not have many strong arguments. Analysts say that the announcement to look into a possible Google relationship was an attempt to lift its share prices and even attempt to buy back its own shares. Despite the attempts, experts say that even these options would not give Yahoo enough funding to match Microsoft’s $31 a share offer to Yahoo stake holders.

"I still think Microsoft holds the cards and the cash," said UBS analyst Benjamin Schachter.

If Microsoft successfully forms a deal with News Corp and acquires Yahoo, it would bring together three major online forces: Microsoft’s MSN, News Corp’s MySpace and Yahoo. Analysts however are concerned that this would bring up antitrust issues.

"The whole situation seems to be very unstable. There are so many pent-up moves for consolidation but it’s hard to say what moves will be successful," said Jeffrey Lindsay, analyst for Sanford C. Berstein.

Yahoo board members have less than three weeks left to accept Microsoft terms. Meanwhile, Microsoft is increasing its pressure on Yahoo, threatening to take its offer directly to shareholders. Microsoft CEO Steve Ballmer recently stated that he will do whatever it takes to make Yahoo part of Microsoft’s business plans. Jerry Yang, Yahoo Founder and CEO said that he would not sell Yahoo to Microsoft or anyone else if the offer did not meet Yahoo expectations of its own value. In February, Yahoo’s own shareholders lashed out against the company and jointly filed lawsuits after Yahoo’s first rejection of Microsoft’s offer.