• Reuters, Wednesday, July 16, 2008 10:45 AM

The Microhoo circle of life keeps on turning. Following the latest failed attempt to bring the companies together, Reuters reports that Microsoft and Yahoo, in a huff, have parted ways and are now each pursuing a deal with Time Warner's AOL. Sound familiar? The same thing happened after Yahoo rejected Microsoft's initial $45 billion offer for the company back in February. Now, both companies are keen to have some kind of deal in place before Yahoo's Aug. 1 shareholder meeting.

A Microsoft-AOL union would likely send Yahoo shares down even further, while an AOL-Yahoo deal might give CEO Jerry Yang something to stand on ahead of his showdown with Carl Icahn and his proxy slate of directors. The structure of the proposed deals is unclear, Reuters says, though sources claim that deal with Yahoo would likely involve a direct merger with AOL, with Time Warner taking a stake in the combined company. A Microsoft-AOL deal would likely be an outright sale, and would certainly bulk up the software giant's display advertising business. Microsoft also needs to prove to shareholders that it has a viable Internet strategy, especially if a Yahoo deal fails.

Meanwhile, Reuters says Time Warner is shopping AOL around as part of its broader strategy to refocus on content rather than distribution. TW plans to complete a deal to separate from its Time Warner Cable by the end of the year.

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