• MediaPost, Thursday, April 10, 2008 11:45 AM

Yahoo and 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.

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