April 10th, 2008
08:27 AM GMT
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LONDON, England – Now there's speculation that Yahoo is close to making a deal with Time Warner's AOL. According to press reports, Yahoo would gain control of AOL, get a cash investment from Time Warner in return for about 20 percent of the Yahoo/AOL tie-up. Time Warner is also the parent company of CNN.

I think this potential deal is less about Yahoo/AOL and more about anyone but Microsoft. Yahoo has rebuffed Microsoft from the moment it made its unsolicited offer of $31 a share. It rejected the Microsoft bid, saying it was too low and not in the best interest of shareholders.

It can be argued that AOL isn't the strongest player to tie up with. In terms of search queries, Google of course is the most popular site, attracting 59.2 percent of queries in February. Yahoo is number two with 21.6 percent, Microsoft 9.6 percent, and AOL is a distant fourth with just under 5 percent of search queries.

But Yahoo could take the cash it gets from Time Warner, repurchase Yahoo shares at a price in the mid-30 dollar range. That would be above where the stock is now trading.

Even if the Yahoo/AOL deal doesn't happen it could be used as a bargaining chip to force a higher price from Microsoft.

Meanwhile there are media reports that Microsoft could team up with Rupert Murdoch's News Corp to make a bid for Yahoo. News Corp owns the popular Web site MySpace. Now that could be formidible combination, and one that would likely be much more attractive to Yahoo shareholders.

Microsoft has threatened to take its fight directly to Yahoo shareholders via a proxy fight. The smart money is still on Microsoft winning its battle for Yahoo. But for now Yahoo is doing everything in its power to prevent that happening.

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