• by Tanya Gazdik , April 10, 2008

Yahoo and Time Warner Inc.'s AOL are negotiating to combine their Internet operations, a move aimed at thwarting Microsoft's overtures to Yahoo, according to an unnamed source cited by The Wall Street Journal.

Time Warner would fold AOL into Yahoo and make a cash investment in return for about 20% of the combined entity. The deal wouldn't include AOL's dial-up access business and values AOL at about $10 billion, the Journal reports. Under that plan, Yahoo also would spend billions to buy back stock to put some money in shareholders' pockets.

Any such deal must first be approved by Yahoo's shareholders. The combination is complicated, and it would align Yahoo with a business (AOL) that Time Warner would like to sell.

The New York Times, however, reports that Microsoft is ready to launch a counterattack and is in talks with Rupert Murdoch's News Corp., publisher of The Wall Street Journal, for a potential joint-bid for Yahoo. Such a deal would combine three of the biggest Internet properties: News Corp.'s MySpace, Microsoft's MSN and Yahoo.

Yahoo has been doing all it can to rebuff Microsoft's overtures, including an alliance with Google for an ad sharing program.

The two-week trial of Google's AdSense for Search service will be limited to no more than 3% of Yahoo search queries and will not included the company's network of affiliate or premium publisher partners. But the move could lead to a broader alliance between Yahoo and Google. It also follows talks the companies have reportedly held about Yahoo potentially outsourcing search ad sales to Google.